15 Year vs. 30 Year Mortgages on Rental Properties

20 Replies

In my market (Denver metro) properties are pricey and the amount of money that could be saved on interest for a 15 year vs 30 year mortgage is significant.  I am thinking that properties here would be best utilized by leveraging equity in them to buy more properties, and the 15 year notes would also help with that.  

I am also looking at properties out of state (less than $100k), and think that going for high cash flow there with 30 year notes would be best.

What are the prevailing opinions out there about 15 year versus 30 year mortgages on rental properties?

@Ryan Denman I prefer longer term, cheaper payment. Debt for rental properties is at historic lows and I'd rather create financial arbitrage by investing the cheap interest debt and earning an even higher interest. 

But if your goal is to own these free and clear and are fine with the cash flow being lower for awhile, go with the 15.

Hi @Ryan Denman , I align with @Jake Stuttgen in seeking longer term lower initial down payment as well. 

I am after monthly cashflow so that makes sense in my mind by keeping the mortgage payment as low as I can, but if you can afford a 15yr and still have a good cashflow each month then that sounds ideal to me!

I keep my eye out for super deals that need some TLC and pay cash for them. Most pay for themselves in 3 or 4 years at most.

Originally posted by @Alexander Lang :

Hi @Ryan Denman , I align with @Jake Stuttgen in seeking longer term lower initial down payment as well. 

I am after monthly cashflow so that makes sense in my mind by keeping the mortgage payment as low as I can, but if you can afford a 15yr and still have a good cashflow each month then that sounds ideal to me!

 I agree with Jake & Alexander. Also remember 2 things: 1) principal payments on loans aren’t tax-deductible, 2) interest deduction is a huge offset to your rental income for tax purposes. If you pay down too aggressively (15 yrs instead of 30 so you’re paying more in principal & less in interest) you could be in an odd situation where you owe more in taxes than your positive cashflow each month so you have to come out of pocket each month to cover your taxes. Not ideal!

Example: Let’s say your net monthly income before principal pymt is $1k. You then make a $1k principal pymt on your loan as required by the 15-yr paydown schedule. You now have $0 cashflow for the month but you owe taxes on that $1k amount! Just an overly simplistic example to illustrate the point.

As a conservative long-term investor, I've gone for 15-year for a faster payoff to arrive at F&C, which brings in a great retirement income.  

However, as a RE Broker, I've advised many buyers to go for a 30-year loan, and when things are flush, add some principal payment.  When things are tighter, you can simply pay the minimum.  Taylor according to your best fit.

That is great advice @Marc Winter ! I must admit I do add an additional $1200 ($100 a month saved up) and make an extra payment on principle of my loans as well. It definitely helps attack the remaining balance and isn't cutting into my monthly return much

I agree with Marc.. That strategy was even more useful when interest only loans were available so u minimized amortization but the next best thing is the 30 year fixed, especially with the lower rates today.  In my humble opinion..  good luck

No question..... 30 year fixed.... you can ALWAYS make payments like its a 15 year if you want to pay it off faster..... but it doesn't work the other way if things tighten up and making the higher payments on a 15 year gets dicey for whatever reason.....

The view point of having the place paid off and now "look at my huge monthly income from it", is very misleading... yeah you aren't paying interest anymore, but you are essentially getting bigger checks each month because you are paying yourself back for all the $$ you used to pay it off

When you had a mortgage you got a check of $500 each month...... now that you quickly paid off that 100k house, you get a check of $1000 a month..... but where do you think that "extra" $500 came from? It came out of your bank account to pay it off.......so you are just pulling $$ back out of your "bank account".... it didn't just magically appear.....if you hadn't used that $$ to pay it off, you would have had that $$ sitting in your normal bank account already..... not be essentially writing yourself a check each month.

You save interest, so in the long run, you make more %%..... but you lose the tax write off..... and your extra monthly cash flow is basically paying yourself back......

@Ned J. , you are absolutely correct!  All I would add is, the TENANT is the one doing the paying-off of the mortgage.  Without the property and the tenant paying it off, why bother to invest?

I have an Excel model that spits out cash on cash return and yield (includes mortgage paydown) both come out with a significantly higher rate of return on a 30 year then a 15 year. As long as tenants paying mortgage not you it doesn't matter how much interest is payed.

You can always resell the place on a wraparound if you don't own it free and clear. In my case, I'm into buying until the pay down, screw the tax benefits; and when I own them outright, to become the bank and deal with them however I please. But I'm of the LIEN lord mindset, not the landlord.

@Ned J.

I actually agree with most of what you're saying. The only thing I disagree with is your statement about paying off a loan. I do think there are many benefits to paying off a loan. Let's say I own a $250,000 loan with a conventional FHA loan around 3.5-4.5% interest well with interest now I'm closer to 400k on what I owe.

We should always remember that your home loan is your principal and interest that 250k home isn’t really 250k it’s more like 400k that’s what I would actually pay for if I made every payment on time during the lifeterm of the loan.

So every time I make a payment directly against my principal in the beginning of my loan I am actually saving myself a lot of money. I put 50k towards that property I mentioned earlier directly against the principal. In doing so I:

1.) Took seven years of payments off of my loan

2.) Saved myself 43k on the total cost of the loan that’s close to 85% return on my cash investment.

Now it’s careful to note I don’t think it’s the end all be all solution. For example I don’t think you should make principal payments towards the end of the loan. At that rate nearly all of your money s being invested towards the principal and you’re not saving as much on your interest or decreasing the lifetime of your loan.

Long story short I think there are advantages and disadvantages to any path you choose, whether that be 15 vs 30 vs paying off your loan. It all depends on what you’re trying to accomplish. Just make sure you understand the pros and cons to Both and choose what’s best for you and personal situation.

I’d consider the cash flow. If it cash flows at 15 year with conservative numbers how could you go wrong. But if it cash flows that strong. You could use a 30 and use that net profit as money to use on another property. It depends on your goals.

Someone else mentioned buying a property that needed TLC. If you find a TLC property that is below market, you update it with 30 year financing and then refinance into the lower term afterwards.

If you are trying to scale up and get more and more properties than shorter term, higher payments can hurt you. The bank looks at your global cash flow in order to give you more loans meaning that their willingness to give you more loans depends on your ability to pay down the mortgages with the cash flow that you have. This lower payments will help you obtain more loans and higher payments will hurt you.

Consider the impact on your DTI ratio as well. If I had gone with 15 year mortgages, the higher monthly payments would have pushed my DTI high enough that I wouldn't be able to qualify for any more purchase loans. With the 30 year, my DTI stays low enough that I can keep buying.

Oh no doubt, you save on the interest part so you actually pay less for the house....or more correctly, the tenants pay for the house......

BUT it really depends on what you are doing with that "extra" $$..... you can take that 50k and pay off your loan at 4.5% and your monthly check from the tenant is technically a higher cash flow now than when you had a mortgage...... but you now have 50k less in your pocket RIGHT NOW..... that higher cash flow will replenish that bank account, but it will take a LONG LONG time to recoup that 50k....... vs taking that 50k and using it for other investments

The single benefit to having a paid off property is RISK....... your only required cost is now taxes....... still need to pay for maintenance and insurance etc, but technically they aren't required........ so if something bad happens..... huge vacancy, you get sick, lose your job....... the bank isn't going to come take your house away....unless you don't pay the tax. So you have lessened your risk when bad sh*t happens since you own it outright.

But you have restricted your ability to expand, and scale because the $$ is all in your house....lower risk but lower returns......

The "sweet spot" is to leverage enough to maximize your returns, but not enough that when bad stuff happens....and it will..... you don't collapse under all that leverage. The level of comfort with risk is different for everyone......

@Ryan Denman I definitely agree with @Marc Winter on his idea. Do a 30 and when times are good, lay more toward principal and when they're lean, pay the regular amount.

Say you have a bad turnover with a tenant and it costs you a bunch. Well, pay the regular mortgage until you recoup.

@Ryan Denman it really depends on your goals like others have mentioned. One thing that is rarely mentioned in this discussion is time value of money. In simple terms, say your mortgage is $1,000. That mortgage payment will seem less in 25-30 years due to time value of money. So saying that you pay less on a 15 year is true if you are just looking at cost, but that’s not factoring in time value of money.