15 vs 30 year refinance in Temp, AZ. Or Cash-flow vs Pay-down...

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15 vs 30 year refinance in Temp, AZ. Or Cash-flow vs Pay-down...

Nehemias Ponce
Tempe, AZ · Member since 2016 · 40 posts · 8 votes

Hi everyone! We're about to refinance our rental property and I am looking for some advice. Here is some background information first. The property is located in Tempe, AZ and is currently valued at approximately $200,000. The principal balance on the note is $121,500 at 5.25%. Our payments are $950 and we collect $1,100 a month in rent on it. We are definitely going to refinance, however I am not sure what length of a note we should get. Below are two possible scenarios:

1. 15 year note: Conventional wisdom says that paying down the note sooner would save interest and of course lead to a more full cash-flow from the property sooner. 

2. 30 year note: However, currently the property sustains itself in that we do not pay any interest on it at all (out of pocket), the tenant does. So then, a 30 year note would allow us to cash-flow even more than we do now. 

I do not have any numbers as of yet to give a more precise calculation. This is just a general query regarding the benefits of maximizing cash-flow vs faster pay-down in the current and near-future markets. We will also be holding this property. We have no plans to sell. Our future plans do include purchasing another investment property. I'm studying about it right now and hope to begin analyzing properties soon. 

I'm especially interested in hearing from people @Hannah Hammond familiar with the Phoenix market in particular who might weigh in on one note versus the other. However, all help @Mindy Jensen is so very much appreciated. Thank you for any knowledge and guidance you can provide!

-Nehemias

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Rami W.
Rental Property Investor · CA · Member since 2011 · 82 posts · 32 votes
10y

30 year and pay additional monthly towards the principal when you can/want to.

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Bob E.:

    @Dan Schwartz  Probably not.  People that were leveraged were crushed.  Those that weren't could buy amazing deals.

    I was leveraged and was NOT "crushed".  I know a lot of leveraged investors that had no problems through the GFC.  In FACT, those were the people that had the ability to take advantage of amazing deals because all their money was not tied up in highly illiquid assets.

    0Reply
  • Jennifer L.
    Investor · San Jose, CA · Member since 2015 · 246 posts · 183 votes
    10y

    I refi'd to a 15 year loan on my rental property in 2004.  I even made extra payments and it will be paid off about 16 months early.  My reasoning is that I wanted it paid off before my kids went to college, so I was using my rental like a 529 plan.  I know this goes against conventional wisdom, but it was an approach that made sense for my financial needs.  I liked the idea of being able to use the property to pay for college or whatever else I need, vs. a 529 that had to be used for college.  

    4Reply
  • Ciprian L.
    Real Estate Agent · Burbank, CA · Member since 2012 · 271 posts · 79 votes
    10y

    @Bob E.

    I’ll try to explain it to you.

    Let's assume that you have a mortgage at 4%. 

    I don’t know the exact numbers, but let’s assume 15 year payment is 2,000/month and 30 years is 1,500/month.

    You choose the 30 year loan with a lower monthly payment and you have the option to pay the extra $500 to pay your loan faster and you save the interest of 4%.

    If you can invest the $500 in something that can return 6 or 7% for the next 30 years what do you do? Give more money to the lender each month to pay down your house earlier or invest for the extra 2 or 3%?

    500/month invested at 4% over 30 years = 349,970

    500/month invested at 6% over 30 years = 502,810

    500/month invested at 7% over 30 years = 606,438

    It’s a very big difference over a long period of time.

    If you have to choose between paying more to the lender each month or spending the money, then the 4% return is much better than 0%.

    The fluctuation in the value of the property has nothing to do with paying your loan earlier.

    If you keep the money and don’t give it to the bank (lender), you can get over bad times much easier.

    0Reply
  • Nehemias Ponce
    OP
    Tempe, AZ · Member since 2016 · 40 posts · 8 votes
    10y

    Thanks so much @David Faulkner. I've definitely had to reread and will continue to read that response. I didn't know something like that was possible.  

    0Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Ciprian L.  Thanks for explaining how the world works but right now we hold full or half interest in 27  houses, land contracts, and notes with another 10 houses under contract and due in the next few weeks.  We have yet to take out a mortgage.  Most people on BP are mom and pop they have 2,3 or 4 properties, when one goes vacant, they feel the pain.  If they have a mortgage it is even more painful.

    @Account Closed  We are based in Phoenix, we know plenty of people that WERE crushed in TGR and have built our portfolio picking up the wreckage they left behind.  Different market, different dynamics.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Bob E.:

    @Ciprian L.

    @Account Closed  We are based in Phoenix, we know plenty of people that WERE crushed in TGR and have built our portfolio picking up the wreckage they left behind.  Different market, different dynamics.

    Poor investors will probably be crushed in any downturn.   Blaming it on leverage is incorrect.  Leverage is one of the best tools for intelligent real estate investors.  Just because some people do not know how to use a tool is no reason to curse the tool. 

    You also might want to rethink scavenging wrecks as a business plan.   Sure it works in an up market but when the market turns you could be in the same position as those that you benefited from in "their" down market.

    1Reply
  • Pete T.
    Real estate investor · Las Vegas · Member since 2013 · 798 posts · 171 votes
    10y

    Bob E., I actually agree w/ Bob Bowling on this one.  Being leveraged isn't the problem.  Its not having exit strategies.  Also, leveraging multiple places help offset vacancies, multiple repairs, etc.

    0Reply
  • Nehemias Ponce
    OP
    Tempe, AZ · Member since 2016 · 40 posts · 8 votes
    10y
    Originally posted by @Account Closed:

    I can agree with you up to the last line.  If he bought this 0% down and the $80,000 equity is appreciation then IT IS A VERY GOOD INVESTMENT!  

    We were fortunate in this instance to have been able to use a VA loan to get into this property with no money down. I just need to capitalize on this fortune some more.

    0Reply
  • Nehemias Ponce
    OP
    Tempe, AZ · Member since 2016 · 40 posts · 8 votes
    10y
    Originally posted by @Thomas S.:

    Holding equity in a rental property is a poor use of cash. There is no reason to pay off a rental as it does not increase real cash flow.

    As your rental shows having a $200,000 property and  paying 5.25% on $120,500 is costing $950/month. The equity you have in the property is $78500. At your mortgage rate of 5.25% your equity is saving you $343.43/month meaning that amount of your rental income is attributed to your equity value. 

    $950 + $343.43  = $1293.43

    $1100 - $1293.43 = ($193.43)

    Your rental property after attributing a return to your cash equity is negative $193.43/ month.

    Not a good investment.

     I think I was having a hard time reckoning the above because we didn't put anything down on this property. 

    0Reply
  • Nehemias Ponce
    OP
    Tempe, AZ · Member since 2016 · 40 posts · 8 votes
    10y

    @Thomas S. Can you explain what you mean by "your equity is saving you $343.43/month meaning that amount of your rental income is attributed to your equity value?" I don't understand what that figure ($343.43) means.

    0Reply
  • Nehemias Ponce
    OP
    Tempe, AZ · Member since 2016 · 40 posts · 8 votes
    10y

    @Ciprian L. Thank you for that last explanation! Makes total sense...

    0Reply
  • Nehemias Ponce
    OP
    Tempe, AZ · Member since 2016 · 40 posts · 8 votes
    9y

    @Bob E. I was reading over this post recently and have become more and more interested in what you said about your midwest rental purchases. Can I ask you some questions about that?

    0Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    9y

    @Nehemias Ponce  Absolutely.  My contract information is in my profile.  I am home all 4 days over the Thanksgiving break.

    0Reply
  • Account Closed
    Entrepreneur · Frisco, TX · Member since 2015 · 88 posts · 44 votes
    9y
    Originally posted by @Bob E.:

    I guess I just don't understand the "Borrow all you can crowd".  When you are leveraged to the hilt and your renter loses their job and stops paying leverage can really hurt you.  You are getting no rent, have to pay legal fees, then rehab the unit and re rent it....  All while paying the mortgage(s).  

    There is a down side to debt.  Remember the last recession!  

    This is why I will only ever buy multi-family, never SFH. Plus, I'd recommend keeping $10,000+ (or 6-9 months of payments) in reserves per property.

    1Reply
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