Investor · Denton, TX · Member since 2017 · 49 posts · 17 votes
Hello all! I buy SFRs to rent out. All mine are currently on 15 year notes, and while I understand the fiscal benefits of paying off loans more quickly via a ten or fifteen year mortgage, I struggle with my desire for monthly cash flow. Has anyone else dealt with this conflict? On one hand, pay the notes off faster, less interest and woohoo on the day a house note is paid off. On the other hand, renters are paying the notes so who cares, and a 30 year note would mean lower montly payments, thus a higher monthly cash flow, more houses bought more quickly. What have y'all done with your notes?
You answered your own question...cash flow. Let me add this to your thoughts:
1 - Who pays the mortgage? The answer, as long as there is positive cash flow, is the tenant...so don't help them.
2 - What is "your" cost to buy the property? The answer, as long as there is positive cf, is whatever comes out of your pocket. The down payment, and any extras you pay for...so don't pay extra to pay off a loan faster. All that does is add to the cost to you, and helps the tenant pay off your mortgage (buy the property for you).
3 - Whatever money you pay for, with your money, is money you have to "recover" (through the cf) before you start making a profit. The less that comes out of your pocket, at any time, the better. Remember, just because you may have a longer pay period (30 years instead of 15), doesn't mean you are paying more for the property. All it means is you have higher CF, and the tenant is taking longer to payoff the property "for you". Let them...that's their job...don't help them.
I feel your pain and there is no right or wrong answer. It is what makes you feel comfortable.
My wife is one who wants paid for properties, I do not really care if it cash flows. We have come to an understanding. I always mortgage for as long as I can. My wife pays the bills so to accomdate her. I told her she can use a certain amount extra on the smallest loan and pay mininmum on the rest. This has worked out nicely.
This worked out extremely well recently when I needed the cash for house my wife had found. We refinanced the loan she has been paying off to get the equity out and will be using the proceeds for the downpayment and rehab of (her) house. She was not keen on the idea until she seen the numbers. The payment on the refinance was less than what she had been paying originally and we have another property that should cash flow an extra $200 per month over its expenses and payment, a win/win.
As I told her once we get to our (number of houses we want) we will start paying off or paying cash properties. I am not getting in younger so I want quantity. One house and mortgage and you have a vacancy it hurts. 50 houses and 5 vacancies everyone still gets paid with no trouble, just might not be able to go to the steak house. LOL
You answered your own question...cash flow. Let me add this to your thoughts:
1 - Who pays the mortgage? The answer, as long as there is positive cash flow, is the tenant...so don't help them.
2 - What is "your" cost to buy the property? The answer, as long as there is positive cf, is whatever comes out of your pocket. The down payment, and any extras you pay for...so don't pay extra to pay off a loan faster. All that does is add to the cost to you, and helps the tenant pay off your mortgage (buy the property for you).
3 - Whatever money you pay for, with your money, is money you have to "recover" (through the cf) before you start making a profit. The less that comes out of your pocket, at any time, the better. Remember, just because you may have a longer pay period (30 years instead of 15), doesn't mean you are paying more for the property. All it means is you have higher CF, and the tenant is taking longer to payoff the property "for you". Let them...that's their job...don't help them.
Although I agree with all above, and I'm not advocating for or against either strategy, another thing to consider is as long as your tenants are paying your mortgage anyway, I think it would be better if they were paying down the principal of the loan, instead of interest. That's done by getting a 15 year note.
If you have many properties all on 15 year notes, 7 or 8 years into the note you will have plenty of equity that could be tapped into through refinancing. If you needed it, or you could even use it to purchase more properties. If you had a 30 year note, your loan balance would be about the same.
There is logic in wanting to pay off a personal home for emotional reasons, none in regards to paying off a investment income property. You are buying cash flow at a cost of nearly three times todays mortgage interest rate having cash sitting dead in real estate.
Paying down a income property mortgage is a emotional decision definatly not a wise financial decision.
@Randall Cornelison 30 year notes to improve cash flow. 99% of the time I hear of 15 year notes it's for college savings for the children of the investor.
@Randall Cornelison you can mathematically determine which is better by doing a discounted cash flow analysis on the two.
That's true only if the money used to make the mortgage payments was coming from the owner/investor. If you have positive cash flow, the money is coming from the tenant, so this method of analysis, or most other typical methods of financial analysis, isn't valid here.
@Joe Villeneuve I disagree discounted cash flow analysis doesn’t assume the owner is paying the money and is definitely valid in this situation and can factor in the complexities such as refinancing a 15 year loan to pull out equity or buying more properties.
@Joe Villeneuve I disagree discounted cash flow analysis doesn’t assume the owner is paying the money and is definitely valid in this situation and can factor in the complexities such as refinancing a 15 year loan to pull out equity or buying more properties.
When you run the analysis, what factors are you using for positives and negatives?
@Joe Villeneuve I use the expected cash flow and any refinance events I get a lump sum of cash in 7 years and then the monthly cash flow decreases accordingly compared to the 30 year where I wouldn’t be able to refinance, I have to track the equity in each loan to assume when to incoprate a refinance.
@Joe Villeneuve I use the expected cash flow and any refinance events I get a lump sum of cash in 7 years and then the monthly cash flow decreases accordingly compared to the 30 year where I wouldn’t be able to refinance, I have to track the equity in each loan to assume when to incoprate a refinance.
OK. You can still REFI with a 30 yr if the property is appreciating enough,...but that appreciation would be the same for both 15 and 30.
The CF for a 30 vs a 15 is higher with the 30. That would be 7 years worth of higher CF.
When you refi the 15 in 7 yrs, you're only looking at about 30% of the original loan in available "cash out"...and, you'd have even lower CF.
In the end, I think the 30 wins out almost every time.
I have always done 10 year term loans. When we bought 32 multifamiliy units we have a 20 year term with a 5 year seller financing for 20%. Paying the five year second is a killer(for 18 more payments). We also have a dozen units that are finance with other people's money at interest only 8%. They cash flow great at interest only.
Maybe, spread the risk.
The big advantage of the 30yr loan is flexibility. If you want to pay it down in 15 years, just make extra principal payments. If you run into hard times, the rental market drops, etc, you can stop making those extra payments and still be in the black. You want to be defensive so you're never in a position where you are losing money and are forced to sell for a loss.
I'm a fan of 30-year loans because I value the flexibility. With a 15-year loan, you are forced to make a higher payment no matter the circumstances. This can create risk of negative cash flow during vacancy or other events in which income is low or expenses are high.
If you do want to pay down the debt more quickly - and I have done this - then you can set up periodic auto-payments from your bank. I like making quarterly "extra" payments. I've also made extra principal payments if I've sold a stock or other investment and want to put the money to work for me. Paying off a mortgage is a solid guaranteed investment at an interest rate higher than you can get from any AA investment (like a bond).
One endorsement of 15-year loans is on BP podcast #279 starting at 5:10 and continuing for
Let's not forget about inflation. Your mortgage will stay the same for the entire 30 years but the value of the dollar will be significantly less on that last payment then it is today.
At 3% inflation $1 in 30 years would be worth about $.40 today. So would you rather pay the bank $1 or $.40?
I’d rather have all my properties paid off in 15 years. Then you have no worries about paying the bank anything. Sure, some people might call it dead money, but owning your properties outright and never having to worry about debts will provide you the best sleep you can get at night. For me, it’s not about continually buying more and more and leveraging more and more. I have 30 properties. All 30 are set to be paid off anywhere between 11-15 years from now. That $40,000 monthly gross income from them will be extra sweet when there are no longer any principal and interest payments left.