All Forum Posts by: Dan Richter

I had that in mind, but that's why I said only 5 years, because the 15 year ROE rapidly drops off to be less than the 30 year loan. So I was planning on pulling out equity every 4-5 years or so to drop in a new property.

 I actually believed the 30 year note was the way to go until I read one of Gary Keller's books, where he pointed out a 15 year note was a quick way to build equity at the sacrifice of cash flow. Before that I never even considered a 15 year note.

The numbers still worked in the 15 year loans favor, and I was using 10%...

OK if adding $91 is mandatory, it will be done on both sides. My cash flow for the 15 is now $0, and my cash flow for the 30 is now $161. So let's look at monthly numbers now. 15 year: $0 + $325 principle = $325. 30 year: $161 + $96 principle = $257. I'd be making 26% more per month with the 15 year note.

The difference between $591 and $430 is $161. Where is that $161 going to come from if I only cash flow $70? I'd have to match $91 with my own money. These numbers sound small, but I want this to be scalable. I'd have to more than match my cash flow just to get the same growth as the 15 year note. If I had 100 similar properties with exact setups, I'd have to find an extra $9,100 every month.

@Jieh Larson

It's not even about the interest rate, I just made the 15 year 1 point less to make it more realistic. They can even be the same, but the principle payment on the 15 year loan is more than the (principle + cash flow) combined for the 30 year loan. And $900 isn't much, but what if we 100x all the numbers, it's looking like a big difference.

and @Russell Brazil, if I wanted to have a 30 year loan, and have an equal net worth after 5 years, I'd have to put some extra personal cash in. I'm trying to see this as if it was a closed system.

Well you guys are saying I can just pay more if I want to, but with what money? On the 30, all I have left to pay is the $70 from cash flow, which is still less than the $226 I'm getting per month from the 15 year loan. 

And with an actual rental property, I wouldn't buy if it was going to cash flow negative, this is just one example.

It seems that the general consensus for a rental property loan would be a 30 year loan, and I used to agree. The idea is that you can use the cash flow to pay the loan if you want to, or use it for a higher returning investment. Again, I used to think that too. But in every simulation I run, the 15 year loan is giving me a higher net worth after 5 years than the 30 year loan. My goal is net worth, I don't care about cash flow. Can anyone prove that a 30 year loan would better meet my goal? Because I can't shake this idea:

Let's look at a $100,000 property with an $80k financed. Let's say it rents out for $1000 and has $500 per month in expenses (not including mortgage.) Let's also say that a 15 year loan is at 4%, and the 30 year loan is at 5%.

With a 30 year loan, you pay about $430 for the mortgage, so including expenses, you cash flow about $70 per month. Also, $96 of the principle is also paid off, so in total, in the first year, you make about $2000 on your $20,000 down payment, a 10% ROI. I'm not going to include appreciation.

With the 15 year loan, you pay $591 for the mortgage, so including expenses, you cash flow about -$91 per month. But this time, the principle is paid off $325 in the first month. In the first year you will make about $2900 on the $20,000, which is now a 14.5% ROI, significantly higher.