in a rental...what do most view as better..15yr mortgage or 30 yr

[murphprodigy]

The difference is about 200 a month in payments. I would still be netting over $700 with a 15 yr, so cashflow isnt much of an issue

Let me know if you view on better than the other and your arguement why. Thanks

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[danoodle]

That is a very good question that I have looked into somewhat. Here is a google spreadsheet I created comparing a 15 and 30 year mortgage.

Hands down, I would say 15 is always the way to go, lower interest rate and you are paying so much less in interest over the life of the loan. I did a scenario where the 30 year might be an option in the spreadsheet. This shows if you paid down a 30 year with the exact same payment as a 15. As you can see it adds 11k in interest and 10 additional months. However, the benefit you get by doing this would be if financial hardship came up, you always have the option of dropping your payment down to the 30 year rate. In my example it would be $861.58. Also notice I have the interest rate at 5% for the 15 year and 5.5% for the 30 year. YMMV

So the only argument I would have for the 30 year is having a fall back in case of financial trouble. Or possibly for primary residence homeowners and not being able to afford the higher payments. I would say from an investing standpoint, to go with the 15. Is it worth 11k and 10 months to you to have that option of paying less if something comes up? In my example if you paid the 30 year off with the regular $861.58 payments, you would end up paying a total of $306,604.80, nearly 100k higher than the 15 year. Definitely something to consider.

If I did something wrong in my analysis please let me know, or any feedback is appreciated.

 

[NHS]

opps rental sorry about that

 

[MonTexan]

I'm assuming this is a multi-family or commercial property of some sort (since you're projecting $900/mo net cashflow)? Have you talked to any bankers about financing yet? It's fairly likely that 30 year amortization isn't even in the question for this deal. I've found that commercial loans are generally limited to 15 or 20 year am as opposed to 30 year notes that are available for owner-occupied deals.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[murphprodigy]

Thanks for the advice

This is actually for a single family rental. It is in a college town that is why I am able to charge so high. I've talked with a couple lenders and am deciding between them now(for 15 yr mortgage)

This will be my first non owner occupied rental. Date for deposits at the local college is a week away so I have 7 days to find renters as well. I could still find some after this date but I prefer to do it before as more people will be looking

 

[MonTexan]

Are you *SURE* about your expectations on net income for this deal? Netting $700/mo on a SFH with a 15 year mortgage sounds like a stretch to me. What's your expected purchase price, down payment, and gross rent? Just want to make sure you fully understand the numbers before jumping into your first deal...

 

[murphprodigy]

It is a bit of a stretch as I didnt include any unecpected repairs during the course of the rental. But with Mortgage taxes insurance water and sewer a month I will be paying under 1200. Rent will be 1900. The lease will be for 1 year

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Bilgefisher]

Murph,

Montexan is right, your cashflow is far from $700/mo. He is a very experienced income property owner. You must look long term when considering such things. Maintenance and vacancy for starters. Assume 15% total rent for maintenance. Look at many years, furnaces need replaced, roofs, water heaters, turnover maintenance, tenant wear and tear etc etc. Look at your local vacancy rates to determine that. I have 2.6% locally and still use 8% vacancy rate. So lets run the math.

Mortgage plus taxes and insurance at $1100 or 57%
why are you paying water and sewer?
Maintenance 15% 285/mo
Vacancy 8% $152 (likely much higher in a college town due to larger turnover)
If you use a pm add another 14% (10% for monthly fee and 4% for annual re-lease or lease up)

I'll assume you manage it for now. That's $1537 or $363/mo cashflow. I still think that's a hair high because I left out a few misc expenses that will eat another $50/mo or so.

Heck follow JScott's example to see how to look at the numbers
http://reistartup.com/wp-content/uploads/2008/03/analysis.jpg


I'm certainly not trying to burst your bubble, but just want to make sure your looking at all the numbers.

 

[Rickson9]

I prefer 15 year over 30 year since I can use the 30 year as a 'release valve' if things get tight.

Always give yourself an 'out'.

I apologize if this was already mentioned before; I didn't go through the entire thread.

Best regards.

 

[Bilgefisher]

Rick,

forgive my ignorance. How does a 15 year help over a 30 year? Payments are higher.

I prefer a 30 year because of inflation and cashflow. I don't want my equity tied up. That's the weight to make my leverage work. Its the same reason I no longer pay down principle quicker.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[CommonCents]

One thing to look at is the opportunity cost. If you went w/ the 30 yr, what could that $200/mo leverage as part of a payment on another property or another investment?

 

[Rickson9]

Rick,

forgive my ignorance. How does a 15 year help over a 30 year? Payments are higher.

I prefer a 30 year because of inflation and cashflow. I don't want my equity tied up. That's the weight to make my leverage work. Its the same reason I no longer pay down principle quicker.

Thanks for the question!

There are a few concepts that you touched upon. I will write down my thoughts.

I don't believe in maximizing my returns as much as protection from downside. The quote that sticks in my mind is ironically from Donald Trump who said, "Focus on the downside; the upside will take care of itself." I want to be in a position where I can extend my mortgage from a 15 am to a 20 or 30 yr am if unforeseen things happen. If I am at max amortization, it may be true that I am 'maximizing' the effectiveness of my money, but I will have no 'outs' if I need one.

My investment returns have been satisfactory not because I focused on maximizing returns. My investment returns have been satisfactory because I have minimized the opportunity for permanent catastrophic loss. This is a careful distinction.

Second, from my experience the use of debt and the amount of debt used is a personal choice. Some of the ultra-wealthy borrow easily, others don't borrow a dime. Over the years I have found my personality to be more suited towards the latter. Again, this is a personal choice - there is no right or wrong here; I understand the arguments for both sides and decided what would be best for me. I wrote about this in my 2010 blog on my web site.

Third, although my payments are higher with a 15, the principle pay down is faster which ties into point number two; which was a personal choice.

Fourth, just like status, ego, money, etc; an individual becomes very quickly accustomed to higher levels needed to feel 'successful'. This is an opiate that I wish to avoid.

If 15 better or is 30 better? The answer depends on the investor and their personality and what they are trying to achieve.

I hope this helps clear up some of my opinions!

Best regards.

"When leverage works, it magnifies your gains. Your spouse thinks you're clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices."
- Warren Buffett, 2011 Berkshire Hathaway Shareholders Meeting

 

[hatterasguy]

My 2 cents.

I'm a huge fan of minimizing monthly expenses in anyway possible, because if times go bad like they just did the bigger the monthly nugget the faster it will kill you.

If I was in that situation and a 30 year was an option I would opt for it, and if possible pay more on it so it would be paid off in 15-20 years or less. This way if cash flow decreases you can revert back to the lower 30 year payment.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Illusion]

Thanks for the question!

There are a few concepts that you touched upon. I will write down my thoughts.

I don't believe in maximizing my returns as much as protection from downside. The quote that sticks in my mind is ironically from Donald Trump who said, "Focus on the downside; the upside will take care of itself." I want to be in a position where I can extend my mortgage from a 15 am to a 20 or 30 yr am if unforeseen things happen. If I am at max amortization, it may be true that I am 'maximizing' the effectiveness of my money, but I will have no 'outs' if I need one.

My investment returns have been satisfactory not because I focused on maximizing returns. My investment returns have been satisfactory because I have minimized the opportunity for permanent catastrophic loss. This is a careful distinction.

Second, from my experience the use of debt and the amount of debt used is a personal choice. Some of the ultra-wealthy borrow easily, others don't borrow a dime. Over the years I have found my personality to be more suited towards the latter. Again, this is a personal choice - there is no right or wrong here; I understand the arguments for both sides and decided what would be best for me. I wrote about this in my 2010 blog on my web site.

Third, although my payments are higher with a 15, the principle pay down is faster which ties into point number two; which was a personal choice.

Fourth, just like status, ego, money, etc; an individual becomes very quickly accustomed to higher levels needed to feel 'successful'. This is an opiate that I wish to avoid.

If 15 better or is 30 better? The answer depends on the investor and their personality and what they are trying to achieve.

I hope this helps clear up some of my opinions!

Best regards.

"When leverage works, it magnifies your gains. Your spouse thinks you're clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices."
- Warren Buffett, 2011 Berkshire Hathaway Shareholders Meeting

I would usually suggest using maximum leverage, especially when it comes to real estate.

HOWEVER, if you are not using the difference you save monthly between a 30 and 15 year mortgage on another investment, I suggest keeping it in a seperate account, and using it to pay down capital at the end of the year. You are usually allowed to put up to 15% yearly.

Another tip (and do the math if you dont believe me) :

if you take a longer mortgage, then use the difference to pay down capital yearly, the amortization is actually shorter. For example, using this on a 30 year mortgage lets you pay it off in under 25 (when comparing 30 to a 25 yr mortgage), and still leaves you some breathing room. If you do this with a 30 compared to 15, im sure it will be less then 13 years.

If you use the extra money to lease yourself a BMW however to impress your neighbours, then its a different story.


Leverage can be amazing if used correctly, or devastating is misused.

 

[MNentre]

In my opinion, cash is KING! I'll take the extra cash flow today, to give myself more opportunities for good deals that cross my plate. Also, considering today's rates, I would love to lock a rate today for 30 years!!!