15 or 30 year mortgage?

[Douglas Goldstein]

So I'm looking to buy an sfr in Fresno as a rental investment.  I would enjoy the cash flow until I retire in 20 years and then most likely sell it to help fund my retirement years.  I have two options for the mortgage and wonder what conventional wisdom says is the best route to take.

Option 1: 15 yr fixed rate mortgage.  Cash flow $50/month not including property management.  When it's paid off in 15 years the cash flow is $1,200/month (if today's numbers never change, for the sake of argument).  Then sell it 5 years later.

Option 2: 30 yr fixed rate mortgage.  Cash flow $270/month not including property management.  Sell in 20 years - before it's paid off.

It seems like option 1 gives me more cash at the 20-year mark, but then I miss out on 15 years of cash flow.  Thoughts?

[Bob Anderson]

Most investors opt for the 30 year loans when possible.  It tends to be the less volatile option since it requires a lower monthly payment.  For example lets assume the 30yr mortgage is 1k / month, and the 15yr plan is 1400/month.  When times get rough and the economy tanks, and your tenant moves out, and your hot water heater explodes, which would you rather pay, 1k or 1400?  By having a lower monthly payment it helps to protect you when things go wrong, and at some point things will go wrong.

A 15yr tends to look attractive when you see that it has a lower interest rate, and you will pay significantly less in total interest over the life of the loan.  But let me ask you this, would you rather have $1,000 today, or $1,000 30 years from now?  The answer is easy, you would want 1k today because thanks to inflation the 1k 30years from now won't buy you nearly as much stuff as the 1k today will.  The same principle applies to your loan.  Ideally you want to pay as much as you can with 'future' money, and as little as possible with "todays" money since todays money is worth more.  The 15yr loan pays off the loan very rapidly and therefor uses more of todays money.