Quick Question about the 50% rule.

[Josh P.]

When I'm using it to figure my monthly payment and therefore the max I should pay for a property, am I to go by the monthly payment amount for a 15 year or a thirty year mortgage?

[Bryan Hancock]

The 50% rule of thumb doesn't deal with debt service. NOI is independent of debt service by definition. The NOI has to service the debt and should cover at least 25% more than the debt on normal product to get favorable lending terms.

30-year money is generally better than 15-year money because it reduces your debt service and thus increases you ROE with positive operating leverage. You do pay a bit of a premium on the rate for longer-term money, but it buys you a whole heap of flexibility in paying things back. You can always prepay the note if you wish to reduce your mortgage balance and amortize debt quicker. This is generally a very poor use of cash though.