15 Year vs. 30 Year Mortgages on Rental Properties

[Ryan Denman]

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?

[Eric P.]

Originally posted by @Alexander Lang:

Hi @Ryan Denman, I align with @Jake S. 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.