30 year term loan vs 15 year term on investment properties

13 Replies

So I just wanted to discuss the pros and cons of a 30 year vs a 15 year conventional loan on an investment property. My first post to these forums as a new member to Bigger Pockets!

Quick background on my situation: I'm 28 years old married and bought my first property in 2012 when I was 22. I own 2 properties now both with my father 50/50 split on everything both loans in my name. A large Duplex 4 bedrooms each side purchased in 2012 (FHA loan 203k rehab) and refinanced in 2014 to a conventional 30 year. The other is a three family purchased in 2016 (FHA Loan). The three family has not been refinanced and still holds the original loan. Both properties take in a total (between the 5 apartments) $7250 in rent. The mortgages add up to $4131 leaving me a profit not including expenses of $3119 a month split 50/50. The Duplex has at least 200K in Equity or more from last appraisal. The three family has not had a recent appraisal but seems to have conservatively about 50K in equity in my market.

This is just the basics of my situation. I'm just looking to bounce off Ideas here from experienced investors and maybe investors that have had a similar situation about whether it would be smart to refinance both loans to a 15 year mortgage? I also am looking to increase my portfolio moving forward in life so I'm wondering if this would hinder my ability to do this, but it seems like refinancing and having both these properties paid off by the time I'm 43 or so would be pretty great! Plus my father who is 51 would have the added benefit of having these two properties paid off by the time he's in his mid 60's, probably about the time he will be retiring.

My Father is basically my "Private Investor" so to speak because he has cash and I have more time and energy to put into the ins and outs of finding deals and dealing with tenants. So finding more rental properties may benefit him and I once retired.

Anyway thanks for reading! Bigger pockets seems like a great place to get in touch with investors and I'm glad I found this resource.

Arguments for a 30 year loan: 

(1) You lock in your fixed payment in "2018 dollars" for the next three decades, when that $700 will be worth a lot less (Jason Hartman calls it "inflation-induced debt destruction")

(2)  Since your payments are lower, you have increased cash flow that can be used to deploy capital into new projects

(3)  If unexpected expenses arise (personal or business), you have an immediate source of regular cash flow

Arguments for a 15 year loan:

(1) increased equity over a shorter time horizon

(2) cheaper interest rate

(3) owning property "free and clear" still in your prime years and the lifting of psychological burden of debt

It really depends on your personal strategy and where you want to place your risk. I personally like the appeal of the 30 year note as those arguments better fit my business model.

Welcome @Antonio Similia !  The answer unfortunately is "it depends."  You laid out the pro/con of each approach in your post, so I would take it one step further and do this exercise with your dad:

Sit down for 30 minutes and ask, where do we want to be in 3yrs, 5yrs?  What is the end game, what are we striving to? 

Your answers might be something like acquire 25 properties because that means xx of passive cashflow, or maybe it's have 5 properties paid off by xxx date....etc.  Once you have those agreed upon answers and mission, then figure out if the 15yr or 30yr matches the goal.  If you're going into acquisition mode, the 30yr option is probably going to make more sense.    

Lastly, if your goals do align to running with 15yr mortgage, remember you can keep your 30 yr mortgages but just pay them down as if they were a 15yr (assuming you have the discipline).  This saves you the cost of refinancing if you are satisfied with your current rate, but more importantly, if s*it hits the fan in your personal life you are only contractual obligated to make the lower 30yr payment.  Again, this requires the discipline on your end to stick to the schedule and you can set up auto-payments if necessary. 

@Wesley W. 's  first bullet point for a 30yr is the one that I feel gets lost on most people.  Due to inflation, the you are creating an arbitrage situation where your financing cost stays the same while everything else goes up.

I'm emphasizing this as once this was taught to me I started to really realize how powerful it was to lock into a fixed debt payment for 360 cycles.  

@Antonio Similia - a few points:

1. Refinancing is not free, you can expect to pay around $5K of hard costs. Factor that in.

2. Chances are today's rates cannot touch the one you got in 2004. If so, leave it be.

3. The only way I'd go with a 15-year is if I've had a mortgage for a long time, rates are lower and I don't want to extend to 30 years again. Otherwise get a 30. You can always pay the same amount as you would for a 15-year and knock the mortgage down. But if things go sideways (which we hope it never does), you don't have the option of a "30-year" payment on a 15-year.  

I prefer 30 year. I'm not locked into the larger payment. I can pay more if I want to. I have more free capital to invest in the next property. 

The higher your debt payments, the less money you have. I like to let the bank hold the debt while I buy more properties with my money.

Good luck!

from investment standpoint, i see no reason why 15 years would be better than 30 years in any ways.  Yes, 15 years give you slightly lower interest rate but you benefit way more from 30 years advantage.  "owning the property free of debt" is opposite of investing, so if your goal is to invest, makes  lots of money, grow your portfolio, and be able to live with financial freedom, I encourage you that you leave as little equity in all of your investment property as possible.  

First, most important point is what Wesley said in his first bullet.  You are locking into fix payment for 30 years (as opposed to 15).  Some of your costs like utility, insurance, tax expense will go up with inflation, but so will your rent.  But since your mortgage is fixed your profit margin should increase.

Secondly, over the life the loan you will pay more interest.  For most people, they think this is a bad thing, but its actually not.  Because your rent income is paying for it, so it doesn't matter.  In fact, more interest expenses there are, more tax deductions you get so its better. With 15 year loans, you are paying more principal and less interest.  Because your mortgage is higher, your net income from rental is also lower.  Lower income, and lower tax deduction for 15 yr mortgage, so no reason to use 15 yr mortgage.

Thirdly, it goes in tangent with point 2, but time value and money (TVM). you are using leverage to make money. this only works because you are (on average) making more % return than % you are paying on mortgage. like i said before, with 15 yr mortgage you have less income monthly with less tax deductions. This means you have less money to invest. The extra $150 or whatever amount it is that you get extra from using 30years vs 15 years can be used to invest and earn additional returns. By paying off your mortgage faster (15 yr mortgage) you are only saving 6% (or whatever your interest rate is) while you could have used that same money to get 12% return on another property.

Conclusion: if you are an investor, there is absolutely no reason to use 15 year mortgage.  Hope that helps.

@Wesley W. @Tom Shallcross @Tchaka Owen @Jennifer Rysdam @Michinori Kaneko  

Thank you guys for your replies! This was truly helpful. I do plan on sitting down with my father and making a legitimate plan that we can work towards. My goal as I stated before is to grow my portfolio, maybe even get into flipping properties. So for me it would make sense to keep my 30 year mortgages. For someone else I can see the 15 year or less working for them. 

Real Estate is one of the best investments and I get the point here that a 30 year loan gives investors more money in their pockets to buy more which in turn will make more in the long run. Although it would be nice to own outright there really is no "need" and I would probably put myself and my father in a standstill or at least slow ourselves down tremendously in further investments moving forward.

I hope to be apart of this website to grow as an investor and help others as well. Just need to find that next property! (which is tough right now)

Thanks again everyone this was good info and hopefully this will help someone else too.

Originally posted by @Antonio Similia :

So I just wanted to discuss the pros and cons of a 30 year vs a 15 year conventional loan on an investment property. My first post to these forums as a new member to Bigger Pockets!

Quick background on my situation: I'm 28 years old married and bought my first property in 2012 when I was 22. I own 2 properties now both with my father 50/50 split on everything both loans in my name. A large Duplex 4 bedrooms each side purchased in 2012 (FHA loan 203k rehab) and refinanced in 2014 to a conventional 30 year. The other is a three family purchased in 2016 (FHA Loan). The three family has not been refinanced and still holds the original loan. Both properties take in a total (between the 5 apartments) $7250 in rent. The mortgages add up to $4131 leaving me a profit not including expenses of $3119 a month split 50/50. The Duplex has at least 200K in Equity or more from last appraisal. The three family has not had a recent appraisal but seems to have conservatively about 50K in equity in my market.

This is just the basics of my situation. I'm just looking to bounce off Ideas here from experienced investors and maybe investors that have had a similar situation about whether it would be smart to refinance both loans to a 15 year mortgage? I also am looking to increase my portfolio moving forward in life so I'm wondering if this would hinder my ability to do this, but it seems like refinancing and having both these properties paid off by the time I'm 43 or so would be pretty great! Plus my father who is 51 would have the added benefit of having these two properties paid off by the time he's in his mid 60's, probably about the time he will be retiring.

My Father is basically my "Private Investor" so to speak because he has cash and I have more time and energy to put into the ins and outs of finding deals and dealing with tenants. So finding more rental properties may benefit him and I once retired.

Anyway thanks for reading! Bigger pockets seems like a great place to get in touch with investors and I'm glad I found this resource.

 Always go with the 30 year. You can always overpay on a 30 year but can never underpay on a 15 year.

Why cant you just do a 30 year so your cash flow is higher. Keep a reserve and build it. When there is access cash pay a lump sum towards your mortgage at the end of the year so it pecs away at the amortization period. You have more flexibility this way vs a 15 year..

@Antonio Similia Having said that, keep in mind that you always have the option to "refinance" into another 30yr loan, and pull out equity.  However, most likely whatever interest rate you are paying now is way lower than what you can get now, so just make sure if you do refinance that the equity you pull out - closing cost on refinance can actually generate more return for you than the additional interest you have to pay over your existing mortgage.  Hope that helps!

@Antonio Similia Another reason to stick with the 30 year loans in your case is your stated goal to continue to increase your portfolio. If you were to refi both of these mortgages to 15 yr loans, that would significantly increase your DTI ratio and could make it harder to qualify for new mortgages in the future. Just something to think about that most people don't consider until it's too late.

As others have mentioned, you could still pay more towards the principal on your current 30 year loans and pay them off at an accelerated rate as if they were 15 year loans.  However, the higher payments wouldn't count against you when you went to qualify for a new mortgage because you're not obligated to make them.  You can't pay less on a 15 year loan though, so you have less flexibility there because you are obligated to make those higher monthly payments in full.

Again the answer is it depends. If you are a ultra conservative investor, if you have surplus cash you have no use for, if parking surplus cash is your goal, if earning minimum return on your cash fits your investment plans, if you intend to sell as soon as they are paid off then these are all good reasons to force yourself to save money where you can not easily access a 15 year loan is for you.

If you wish to increase your investments as quickly as possible, If you are not adverse to risk, if you want to earn maximum return on your cash, if you want your property to generate returns as opposed to your cash generating the return, if you have other vehicles that will generate cash flow greater than the prevailing mortgage interest rates then you do not want to park your money in real estate and will see the value of a 30 year loan that is paid by your tennats.

30 year loan. Smaller payments equals more money in your pocket and if you ever want to make a bigger payment, you can do just that. With a 15 year loan, you'll  find yourself with an extremely high payment to make each month.