15-year or 30-year for rental property?

Question

Hey guys! I'm new here, just trying to learn.

I've heard some people recommend getting a 15-year mortgage because it drastically cuts the amount you'll pay in interest. (This is always advice given in relation to a primary residence.)

My question is - is that smart advice for a rental property?

On one hand, it would mean you pay less interest in the long run.

But on the other hand, it would mean less cash flow (possibly pushing it into flat or negative cash flow), and taking away the opportunity of using that cash towards purchasing new properties.

Is it smarter to get a 30-year mortgage so that you can leverage the extra cashflow into new properties which should produce a much higher return on your investment than the mortgage is costing in interest?

And, if that's true for rental properties, is that same concept true for your primary residence, too? I'd love to hear your thoughts!

Eric Long · Answer

Like Mike said above, it depends on your goals and how much you can leverage. True, you will pay more for the loan over 30 years versus 15 years but the 30 year loan has a lower monthly payment. If you are investing and can make a property positively cash-flow while paying the mortgage every month, the total amount you are paying on the loan is nearly meaningless. A 15-year mortgage makes more sense for your home (i.e. the place you live that you don't treat, primarily, as an investment vehicle) since that is sunk total cost for no reason. Conversely, a 30-year mortgage may make sense even on your primary residence and if you have a means of making the larger payments of a 15-year mortgage if you can use that extra money to invest at a rate that outgrows the interest you would be accruing otherwise.

It gets kind of technical, but it boils down to how much do you want to leverage your debt? Some people may not be comfortable with a lot of debt, some may love it. But be careful, not all debt you leverage is good either.

Like all things REI-related, there isn't a clear answer. Just keep in mind your goals and you'll eventually come to a conclusion about what you can "afford".

Jameson Hooton · Answer

Thanks, guys!  That's super helpful!

Mike Greco · Answer

Wouldn't it largely depend on your personal goals?  Lower payments increase cashflow and enable you to invest more (in RE, equities, etc).  There is a large and growing school of thought that (going against that of the older generations) one should never payoff their mortgages.