Wrapping my head around 30 yr vs 15 yr loan

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Wrapping my head around 30 yr vs 15 yr loan

Jon K.
Rental Property Investor · Perry Hall, MD · Member since 2016 · 586 posts · 598 votes

I was hoping folks could help me weigh the pros and cons of using one term over the other for a buy and hold investment. As I think long term about rehabs and refinances or even turnkeys when the numbers work I keep flip-flopping between the two. In my specific circumstance i do not "need" the cash flow. All profit after reserves for maintenance/cap ex/etc will rolled into new investments.

For the sake of the conversation let's say this was a fresh refinance on a BRRRR so we have 75% LTV. I know you have more cash in hand on a per month basis with a 30 year but with the lower interest rate of a 15 year your total profits would be higher. You'd still have access to the equity through a HELOC but then you're making interest payments via a variable rate to use your own money. At the same time with a 15 year your payments amortize faster which to me seems the equivalent of lowering expenses faster without effort.

I know this is all very dependent on individual goals and circumstances but what else may I be missing? I'm currently thinking that as long as I stiil have positive cash flow I'd be better off doing a 15 each time.

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Rich V.Pro Member
Atlanta, GA · Member since 2016 · 81 posts · 45 votes
9y

The 30 year is typically your best bet. With a 30 year, you can always pay the loan down quicker if you choose. If the property is vacant or the drops out a bit, you can just pay your normal payment. The 30 will give you that flexibility.

The 30-year will also increase your cash flow. In comparison to a 15-year. Brandon talks about this in his #AskBP podcast series. The link to the quick 5 min basics is below:

Ask BP: Podcast 63

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  • Account Closed
    Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y

    @Jon K. If you "must" use bank financing, I'd go with 15 year. The savings over a 30 year is phenomenal. However, banks will limit you to about 10 bank loans.

    0Reply
  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 822 votes
    9y

    Go with the 30. You can always pay it off in 15 if you choose, but you don't HAVE to pay it off in 15 like you do with a 15 year loan. Yes you will pay a higher rate than the 15 but rates are insanely low right now. Lock them in! And if you take the difference in your monthly payment and invest it in anything earning more than your mortgage rate, then you will crush the 15 year loan. Look at the whole picture not just how much interest you pay if you carry the loan to term.

    3Reply
  • Jon K.
    OP
    Rental Property Investor · Perry Hall, MD · Member since 2016 · 586 posts · 598 votes
    9y

    @Account Closed While I'm still within my 10 bank loans, is there an alternative that would provide a better deal? I'm aware of hard money, private lending, portfolio lenders but am given to understand (with the possible exception of private lending) that I'll pay a higher rate for any other form of leverage.

    0Reply
  • Jon K.
    OP
    Rental Property Investor · Perry Hall, MD · Member since 2016 · 586 posts · 598 votes
    9y

    @Edward B. Just to play devil's advocate. I'm aware of the compound investment concept where with more cash available to put into a new deal I'll also earn money on that investment and so on which leaves me substantially better off than just saving more money. Couldn't one use a HELOC to tap the equity to achieve the same result while having more money available to invest faster through a lower interest payment and faster amortization?

    0Reply
  • Rich V.Pro Member
    Atlanta, GA · Member since 2016 · 81 posts · 45 votes
    9y

    The 30 year is typically your best bet. With a 30 year, you can always pay the loan down quicker if you choose. If the property is vacant or the drops out a bit, you can just pay your normal payment. The 30 will give you that flexibility.

    The 30-year will also increase your cash flow. In comparison to a 15-year. Brandon talks about this in his #AskBP podcast series. The link to the quick 5 min basics is below:

    Ask BP: Podcast 63

    4Reply
  • Jon K.
    OP
    Rental Property Investor · Perry Hall, MD · Member since 2016 · 586 posts · 598 votes
    9y
    Awesome, thank you for the link. Checking it out now!

    Originally posted by @Rich V.:

    The 30 year is typically your best bet. With a 30 year, you can always pay the loan down quicker if you choose. If the property is vacant or the drops out a bit, you can just pay your normal payment. The 30 will give you that flexibility.

    The 30-year will also increase your cash flow. In comparison to a 15-year. Brandon talks about this in his #AskBP podcast series. The link to the quick 5 min basics is below:

    Ask BP: Podcast 63

    0Reply
  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 822 votes
    9y

    You could do it that way but you would have to build up enough equity to pull the HELOC. In the meantime your money is trapped in the property.

    But I agree with, Rich, the bigger bennie is the flexibility it provides which I alluded to. You may not need the cash flow now but you may need or want it in the future. With the 15, your fate is sealed, with the 30 you have options. Remember, most people go bankrupt because of a lack of cash flow, not a lack of assets, so I choose not to tie my hands.

    2Reply
  • Account Closed
    Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y
    Originally posted by @Jon K.:

    @Account Closed While I'm still within my 10 bank loans, is there an alternative that would provide a better deal? I'm aware of hard money, private lending, portfolio lenders but am given to understand (with the possible exception of private lending) that I'll pay a higher rate for any other form of leverage.

     Sure, but it might pop your head ;-)  For the last twenty years I've been doing

    Owner Carry. I hold the NOTE for the long term. I have the property for only 2 to 3 months. And it can be done for flips (fast cash) too.

    I use "Subject To" to buy houses I can cash flow. I use $25,000 or less to buy a $225,000 house for say, $200,000 (so I have built in equity) taking over the existing mortgage with PITI of $1200. I give the seller their equity at closing and I pay all closing costs out of the $25,000. The Deed gets recorded and new Insurance is issued. Let's say I am into the property $25,000 total. I do NOT do any rehab.

    The house is worth $225,000 so I bump up the sales price to $250,000 (because it is Terms not cash out) I simply clean the property up and sell it Owner Carry to a Tenant Buyer as a “minor fixer” who puts $25,000 down. The new payment cost to the Tenant Buyer is $1400. No real estate agent fees are involved.

    I put $25,000 in to buy the house. I get $25,000 out when the Tenant Buyer gives me their down. My monthly cost is the $1200 payment on the original note. My Tenant Buyer pays me $1400 a month. I have $200 a month positive cash flow. I have no maintenance or expenses. I no longer own the house. I have $25,000 on the "back end" that I get when they refinance or sell. All of this within 60 to 90 days. I do this over, and over, and over.

    I wind up with $25,000 extra and $200 a month cash flow. I hold the NOTE for the long term. Some people refi in a couple of years, some never do.

    Ken

    2Reply
  • Jared Bouzek
    Lender · Denver, CO · Member since 2015 · 404 posts · 227 votes
    9y

    @Jon K. You also want to think about how the term length is going to impact your ability to qualify for financing down the road. By using a 15 year mortgage, that higher payment may wind up hurting your DTI. If you don't have a high income outside of REI, that may cause you issues with acquiring more properties down the road. Ideally it would be best to max out your 10 Conventional loans first so you can capture those low interest rates and lock them in for 30 years.

    1Reply
  • Matthew Rogers
    Investor · Tempe, AZ · Member since 2017 · 61 posts · 36 votes
    9y

    I think it really comes down to your goals. If you're trying to build long term wealth and you plan to own the property for the long run, in most cases it makes more sense to go with the 30yr. Like many others have stated, when you do a 15yr you're inherently taking on more risk. We never know what tomorrow will bring us, maybe you lose your job, maybe you go through a period where you can't rent the house for 6 months. 

    Most of the time your rate on a 15yr will be about 1% less than it's 30yr counter. The small 1% cost will bring you a lot of peace in the situation something crazy happens and you need every payment to be as small as possible!

    1Reply
  • Jon K.
    OP
    Rental Property Investor · Perry Hall, MD · Member since 2016 · 586 posts · 598 votes
    9y
    For the record that popped my head. Looks like I'll be up reading another few hours tonight.

    Originally posted by @Account Closed:
    Originally posted by @Jon K.:

    @Account Closed While I'm still within my 10 bank loans, is there an alternative that would provide a better deal? I'm aware of hard money, private lending, portfolio lenders but am given to understand (with the possible exception of private lending) that I'll pay a higher rate for any other form of leverage.

     Sure, but it might pop your head ;-)  For the last twenty years I've been doing

    Owner Carry. I hold the NOTE for the long term. I have the property for only 2 to 3 months. And it can be done for flips (fast cash) too.

    I use "Subject To" to buy houses I can cash flow. I use $25,000 or less to buy a $225,000 house for say, $200,000 (so I have built in equity) taking over the existing mortgage with PITI of $1200. I give the seller their equity at closing and I pay all closing costs out of the $25,000. The Deed gets recorded and new Insurance is issued. Let's say I am into the property $25,000 total. I do NOT do any rehab.

    The house is worth $225,000 so I bump up the sales price to $250,000 (because it is Terms not cash out) I simply clean the property up and sell it Owner Carry to a Tenant Buyer as a “minor fixer” who puts $25,000 down. The new payment cost to the Tenant Buyer is $1400. No real estate agent fees are involved.

    I put $25,000 in to buy the house. I get $25,000 out when the Tenant Buyer gives me their down. My monthly cost is the $1200 payment on the original note. My Tenant Buyer pays me $1400 a month. I have $200 a month positive cash flow. I have no maintenance or expenses. I no longer own the house. I have $25,000 on the "back end" that I get when they refinance or sell. All of this within 60 to 90 days. I do this over, and over, and over.

    I wind up with $25,000 extra and $200 a month cash flow. I hold the NOTE for the long term. Some people refi in a couple of years, some never do.

    Ken

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    9y

    You will save more money, with higher cash flow, with the 30 year mortgage.  Remember, you are not the one paying for the property (making the mortgage payment) your tenant is.  Don't help them by increasing the monthly payment (that increase comes out of your cash flow...that's your money).

    Thinking you are saving money with a higher payment (and reducing the total cost of the loan) is thinking like a homeowner buying their own house. REI is NOT in any way the same thing. It's the difference between a "cost" and an "expense". Buying your own home is a "cost" because it is a one time use of your money. Once your "spend" it, you can't get it back. An "expense" is where you "use" your money, but get it right back to "use" over and over again. The mortgage on your own home is a "cost"...a one way ticket. The mortgage on your rental is an "expense", because it come from the rent payment (the tenant), over and over again.

    This same comparison can be (should be) used to show why your own home is NOT your largest investment...it's your largest cost.  You do NOT make money on your own home...ever.  If you were to sell it after 10 years for twice what you paid for it, and you are still going to lose money on it.  The only people that will tell you that you are making money on it are RE Agents, and Lenders...who are in fact the only people that DO make money on your house when you sell it, or are buying it.

    0Reply
  • Andrew Holmes
    Rental Property Investor · Chicago, IL · Member since 2015 · 275 posts · 271 votes
    9y

    @Jon K.

    Jon: I think I agree with @Rich V. that 30 year loan is better. Your cash flow is higher and if you intend to use all the cash flow for other deals this is a better option. 

    Also if you want you can make direct payments towards your principal and knock it down very quickly as and when you see fit. 

    The 30 vs. 15 year will depend on your business model and goals. 

    If you use a 15 year mortgage it will lower your DCR ratio's. You want to really scale up and fast. You need strong DCR ratios.

    Your Global DCR also becomes very important if you want to scale up to 20, 30 or 50 or more properties over time.

    So rather than just he saving your goals and growth should dictate how you set up your loans and your amortization periods. 

    Let's say your goal is to buy 20 properties in a 2 or 3 year period then the setup needs to be very different than if you goal is to get to 8 or 10 and then stop there. 

    Wish you the best. 

    0Reply
  • William C.
    Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes
    9y
    I decided to go somewhat in the middle with a 20 year amort. The payment was $300 more a month but dollar for dollar that $300 is applied towards principal. We are still getting nearly a 20% coc return with the 20 year option so I looked at it as forced savings. The equity isn't liquid, but I'm OK with that for now. I went through the same process as you. The lower interest rate certainly makes the 15 year more attractive. I think it's 100% a personal preference, so go with the option that fits your goals. Best of luck with your decision.
    0Reply
  • David Garrison
    Dallas, TX · Member since 2016 · 26 posts · 17 votes
    9y

    I help people with this question all the time as I work for a bank. Get the 30. Pay it like a 15 if you feel like it. You never know what expenses you'll have come up.

    Let's say you don't end up with any surprises. You've already worked the numbers, you're cash flow positive, your emergency fund is on lock, and you're looking for the next deal. You can use the extra cash to find new investments.

     If you do have surprises (repairs, etc) and you need to pull back on paying your 30 yr like it's a 15 yr, you'll still be ok.

    My whole thing is this. If you've bought well, you aren't paying that interest anyway. Your renter is. That's the whole point. Finding the next deal and another cash flow positive rental is going to do more for you long term. That 30 year is going to leave you with more cash to buy the next one.

    Edit: If you'd rather do the 15 and get a HELOC later. Fine by me. If you're in my company's market, I'd be happy to get that HELOC application started!

    0Reply
  • Jon K.
    OP
    Rental Property Investor · Perry Hall, MD · Member since 2016 · 586 posts · 598 votes
    9y

    Just to close the loop I've learned just how subjective this really is. If I had my long and short plans better defined then there wouldn't necessarily be as much of a decision to make here. I think I also need to remember that it doesn't have to be 100% one way or the other. A blend of 15 and 30s, or something in between, could "work" as well. My concern wasn't one of reducing debt but of maximizing income. When I go with a 30 I don't see myself paying it down faster because I wouldn't be as concerned with equity.

    I can see there's a lot of wisdom in focusing on cash flow vs equity as I start even if I don't think I need it but I still have some planning to do before I ultimately decide. I appreciate all the responses, it really has been helpful!

    0Reply
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