15 year vs 30 year on 96K rental income

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15 year vs 30 year on 96K rental income

Investor · Washington, DC · Member since 2015 · 24 posts · 5 votes

Hi all! I'm in process of closing on a 96k rental property and trying to decide btw 15 and 30 year mortgage. Below are numbers:

Purchase price: 96,000
Down payment: 20%
Interest rate: 3.125% on 15 yr, 3.85 on 30 yr

Monthly payment on 15: $845
Initial portion towards interest: $208

Monthly payment on 30: $670
Initial portion towards interest: $257

I know the conventional thought is to always opt for the 30 year. But with these numbers, does it make more sense to go for the 15 year? Only about $100 once interest payment is deducted. Thanks in advance!

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Julie MarquezPro Member

Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes

10y

I just went through a similar issue as you buying my first rental house. Just because I could afford it, I took the 15 year. Now I am trying to get a loan for a 4-plex, and the rental house doesn't show the most amazing cash flow. Now I am wishing that I got the 30 year and paid it back in 15 years. That would show greater monthly cash flow, that would help me qualify for future mortgages.

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Asma A.
OP
Investor · Washington, DC · Member since 2015 · 24 posts · 5 votes
10y
correction - only $100 difference btw 15 and 30 year monthly payment
0 Reply
Account Closed
Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
10y
@Asma A. Take the 15 year term. You should thank me each month of the second 15 years.
1 Reply
Brian Turnbough
Investor · Big Spring, TX · Member since 2016 · 140 posts · 59 votes
10y
It depends on what you are looking for. If your going for cash flow then the 30 year would be better. If your wanting to build equity then the 15 year would be better.
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Patrick LiskaPro Member
Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
10y
Will your property support the monthly payment difference for the 15 year and still make you money ? what is your income ? what are your expenses ? figure out what you can collect in rent each month and subtract all your expenses ( mortgage, taxes, insurance, utilities, property management, maintenance, water/ sewer) and see if you will still make money on either loan. the 15 year you will pay less in interest and build your equity faster, then you can use the equity to buy another rental, but if that one doesn't support the loan then don't do a 15 year, got to a 30 even if it brings in $100 / m extra cash
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Russell Naylor
Colorado Springs, CO · Member since 2016 · 214 posts · 58 votes
10y
Whats it renting for? Few other things that should be considered, but minimal difference between the payments makes the 15 yr appealing.
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Alexander FelicePro Member
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
10y
always take the 30 year, as you can pay earlier if you like, and you gain more cash flow.
you gain no benefit from taking a 15 year. paying a house of early removes one of the best aspects of real estate: leverage. Also, you gain equity from paying if off early but that's harder and more expensive to access than the additional cash flow you gave up by taking the 15.
interest rate reduction doesn't matter much as the tenant will be paying the interest.
I'm sure my friend @Joe Villeneuve would like to chime in....
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Andreas W.
Durham, NC · Member since 2013 · 502 posts · 215 votes
10y
@Asma A.
Definitely 30 year. You can take all left over cash and pay down mortgage in 15 years or less. But you can't reduce your mortgage payment when you have the roofers on the house and the HVAC starts smoking.
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Asma A.
OP
Investor · Washington, DC · Member since 2015 · 24 posts · 5 votes
10y
Thanks all for the input, really helpful. Some additional info:
Monthly payment amounts include insurance, taxes, etc. Managing property myself and tenant will pay all utilities. Will rent for 1200 to be conservative (possibly 1250, 1300).
Ideally, I'd like cash flow to get another rental under my belt, but if it's only $100 additional, it seems that I'd be better off paying down the mortgage and building equity. My income will allow me to continue saving outside of this rental, though it's true that one can never anticipate maintenance issues.
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Anna Watkins
Investor · Atlanta, GA · Member since 2014 · 389 posts · 250 votes
10y
According to your numbers the difference in payments is $175. If you take the 30-year mortgage, and always pay $175 extra to principal, you'll end up about the same plus have options. Don't forget that for the first several months the smart landlord socks away ALL the cash flow in reserves, for repairs, mortgage payments during vacancy, escrow hikes, etc etc. Then you can start throwing money at the principal, saving for the next down payment, or planning the Hawaii trip.
6 Reply
Jeff Cox
Hurst, TX · Member since 2015 · 34 posts · 6 votes
10y
i thought the best part of taking a 30 yr is no one sues you if you have no equity in a property right?? IF the house is paid for people will more likely sue. Thats the general idea i got behind most of the podcasts and why people keep REfi and buying more property instead of paying anything off..
Incoming flame war
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Julie MarquezPro Member
Investor · Skagit County, WA · Member since 2016 · 1k+ posts · 807 votes
10y
I just went through a similar issue as you buying my first rental house. Just because I could afford it, I took the 15 year. Now I am trying to get a loan for a 4-plex, and the rental house doesn't show the most amazing cash flow. Now I am wishing that I got the 30 year and paid it back in 15 years. That would show greater monthly cash flow, that would help me qualify for future mortgages.
11 Reply
Sarah Ziehr
Real Estate Broker · Chicago, IL · Member since 2015 · 531 posts · 266 votes
10y
If you plan on holding onto this property for more than 15 years, I might consider 15 year.
However interest rates are so freaking low right now, that I lean towards the 30 year. You will have extra cash every month to invest in more real estate.
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Jacob Sampson
Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
10y
I prefer 15 year notes. Equity is second only to cash. When I first got started investing I did 30 because I wanted to maximize cash flow while I was learning. With a bit of experience, now I cap out at 15. Sometimes I go 10 or 12, even.
When all your cash gets eaten up by a bad tenant or new roof or whatever you will sleep better knowing that, at least, your employees (tenants) are busy paying your property off at a fantastic rate.
1 Reply
Mike Landry
Investor · Montgomery, TX · Member since 2014 · 386 posts · 151 votes
10y
My opinion:
If its one of your first properties, take the 30 year with better cash flow. Not only will this increase cash to grow, it will make it easier to qualify for your next mortgage, and your next one, and your next one. Once you have a few properties with good cash flow and a good record on your tax returns, then throw in a couple of 15 yr loans or nicer properties that don't cash flow quite as much.
Nice interest rates for an investment property by the way. You'll feel like a genius if you still have a loan under 4% 20 years from now. I'd be happy with either.
2 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
10y
Originally posted by @Alexander Felice:
always take the 30 year, as you can pay earlier if you like, and you gain more cash flow.
you gain no benefit from taking a 15 year. paying a house of early removes one of the best aspects of real estate: leverage. Also, you gain equity from paying if off early but that's harder and more expensive to access than the additional cash flow you gave up by taking the 15.
interest rate reduction doesn't matter much as the tenant will be paying the interest.
I'm sure my friend @Joe Villeneuve would like to chime in....
...and, you don't reap the supposed benefit if the 15 year until the end of the mortgage. While paying the first 5-10 years, all you've done is paid more money in interest...it's the lender that gains.
Also, as @Alexander Felice says, "...more cash flow" and "...the tenant is paying the interest (as long as you have positive cash flow)".
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Account Closed
Investor · Bossier City, LA · Member since 2015 · 55 posts · 21 votes
10y
Do a Google search for "Mortgage Amortization Calculator." Plug in the numbers for both options and you will see the difference in the total amount of interest paid. It's astonishing how much is paid in interest over 30 years, even on a great rate like 3.8%.
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Brian Lacey
Rental Property Investor · Hailey, ID · Member since 2015 · 218 posts · 143 votes
10y
Always a 30, as others have said. You can pay a 30 year mortgage in 15 years if you want. Doesn't work the other way.
Also bi-weekly (every 2 weeks) payments take off some of that interest as well.
1 Reply
JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
30 year always gives you options, and using your figures the difference is not $100, it's $175 - forget about what the payment is once the interest is deducted, because you have to pay the whole payment regardless of how it is allocated. Consider this: more buy & hold REIs have to sell because of lack of capital than any other reason. And let's further say you get into a market where you have to rent for $1000. Now by the time you add in vacancy allowances, maintenance, capital expenditures, you are in the negative cash flow and need to subsidize the property with your own funds. So now you have to hope for low/no vacancy AND make sure you never have trouble with your job.
Ideally, buy & hold should always break even *at a minimum*. The day you need/want/have to sell might be the depths of a downturn, so remember: appreciation is fleeting, cash flow is forever :)
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
@Asma A.
I bought 2 properties with 15 year loans, and LOW interest rates. Don't do it. The disadvantages are numerous, and the only fix is a refinance. very costly. I refinanced one, and it costs a bunch out of your increased equity, hits your credit again, and takes time. Not to mention the refi will be at the higher interest. The other I have opted to keep at 15 years hoping to get it paid off as I don't want to take the interest/finance charge/appraisal cost beating. Also interest has gone up and I would not significantly lower my payment. That's 15 years of less money in my pocket. Oh yeah don't forget that the principle you pay the bank is counted as income so it increases your tax burden, while giving you less cash in hand. Smart huh? If you go to the BP calculators and run the numbers using the 2 loans you can really see the difference. I get frustrated every time I look at the numbers for that duplex. I still net over $100 dollars a door CF, but could have had a lot more. These loans were one of my numerous "Newbie" mistakes. The best bet is use a 30 year note, and make payments against the principal. It makes little sense to lock yourself into a 15 year loss of cash flow.
RR
6 Reply
Jim Costa
Investor · Washougal, WA · Member since 2016 · 86 posts · 52 votes
10y
Originally posted by @Asma A.:

Thanks all for the input, really helpful. Some additional info:
Ideally, I'd like cash flow to get another rental under my belt, but if it's only $100 additional, it seems that I'd be better off paying down the mortgage and building equity. My income will allow me to continue saving outside of this rental, though it's true that one can never anticipate maintenance issues.
THE VALUE OF THAT $175/MONTH. Julie and Mike hit the big point beginners don't realize until it is to late. As a new or novice investor "in general" the banks will not use the rental income until you are a "seasoned" investor. minimum 1 year and numbers show up on your taxes. When they do use the numbers they are only using 70-80% of income to qualify. At 70% that's $840. On the surface you break even at 15 years. Once they add in taxes, insurance, repairs, maintenance, vacancy and everything else you added to your taxes to reduce your taxable rent income, you are now in the hole $2-300. Regardless if this is a real number or a just for taxes number (ex: travel allowable write off). You are going to wish you had that $175 extra cash flow. That $175 cash flow results in a $37k loan. This may make he difference if you qualify or not for the next purchase. Once you have a few rentals and this is multiplied by 4-5 and now it cuts your borrowing power by almost $200K you will wish you had the 30 year and cash flow.
As long as the numbers work. I'm going to get creative here.
If you buy another identical property:
Purchase price of $96,000 20% down with closing costs would be roughly $20K. You could get the same first at 30 years 3.85% = $845 Rent of $1200 Cash flow $355.
What about the 20K down payment?
$20,000 amortized 30 years @ 10% = $175. Several investors and lenders would be happy to get this return I'm sure you can find one here on BP. You just doubled your rental income with no additional out of pocket expenses. Instead of $175 extra cashflow you now have $355 to Step and repeat.
FYI if you applied the extra cash flow of $355 to your new 2nd you would have paid off in 45 months. at 45 months your $78,600(first) would be paid down to $71,308. add the$355 to the payment and you would pay it off in 120 more month. Own your house free and clear in 165 months instead of 180.
Which loan gives you the most flexibility!
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Michael Noto
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
10y
I would take the 30 year and pay it off in 15 if you can. Leave yourself flexibility if a big unexpected repair comes.
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
10y
In general, when your 15 is paid off, your 30 will have 75% of it's balance remaining. I would rather be done with the stupid mortgage rather than still facing a 75% hill!
When you have paid off rentals, $175 in cash-flow is a rounding error. It just doesn't matter.
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Brie SchmidtBusiness Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
10y
Originally posted by @Asma A.:

Hi all! I'm in process of closing on a 96k rental property and trying to decide btw 15 and 30 year mortgage. Below are numbers:
Purchase price: 96,000
Down payment: 20%
Interest rate: 3.125% on 15 yr, 3.85 on 30 yr

Monthly payment on 15: $845
Initial portion towards interest: $208

Monthly payment on 30: $670
Initial portion towards interest: $257
I know the conventional thought is to always opt for the 30 year. But with these numbers, does it make more sense to go for the 15 year? Only about $100 once interest payment is deducted. Thanks in advance!
Are you looking to buy more property down the road? If so go for the 30 year.
Lenders use a DTI ( Debt to income) ratio to approve you for loans. With the 15 year your payment is $175 higher which will equal $35k less approval on your next purchase (assuming conventional loan at 4.25%)
If your current income is enough that DTI down the road won't be a problem then do the 15 year
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Account Closed

Investor · Bossier City, LA · Member since 2015 · 55 posts · 21 votes

10y

	Amortization	Principle	Interest Rate	Payment Interval	# of Payments	Additional Payment	Total Payment	Total Interest
1	30	$76,800.00	3.85%	Monthly	360	$0	$360.04	$52,816.10
2	30	$76,800.00	3.85%	Monthly	146	$300	$660.04	$19,499.28
3	30	$76,800.00	3.85%	Monthly	193	$175	$535.04	$26,286.20
4	15	$76,800.00	3.13%	Monthly	180	0	$535.00	$19,491.07

There's several different options on how to approach this loan, between the 15 and 30 year amortization, with and without extra payments.

Option 1: I think we all understand that 30 years with no extra payments is the longest and most expensive way to pay. You end up paying $360/MO for 360 payments for a total interest payment of $52,800.

Option 2: Get a 30 year mortgage and add an additional $300 to your principle payment. This reduces your number of payments to only 146 (12 years) and only $19,500 in total interest.

Option 3: Get that same 30 year mortgage and make additional monthly payments of $175/MO. Compared to option 2, there are 193 payments over 16 years and $26,300 in total interest payments.

Option 4: The last option is to get a standard 15-year term with a lower interest rate. This is essentially the best of both options 2 and 3. You pay over 15 years (180 payments) (similar to option 3) and only pay $19,500 in interest (identical to option 2).

My $0.02:

In this situation, amortization over 30 years with extra principle payments of $300/MO is the best way to do it. You pay more per month ($660.04) and pay the same amount of interest as if amortized over 15 years, but you only make 146 payments, instead of 180, so you pay the loan off in just over 12 years. That means you have three additional years of finance-free income, compared to the 15-year loan.

Additionally, like has been mentioned already before, if something happens (toilet blows up, roof starts leaking, etc.) then you can forego that extra $300 payment and put it to use fixing the property. Once the crisis is gone, you can go back to making that additional payment towards the principle.

If you can't afford the full $300/MO extra, then consider doing the 15-year option. You pay $125 less per month but still pay the same in total interest.

Hope this helps, and good luck!

Austin

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Federico Gutierrez
Realtor · Cleveland, OH · Member since 2015 · 2k+ posts · 857 votes
10y
Go the 15yr option if it's only $100 difference
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