Loan Terms: How long or How Short?

[Adam Craig]

This goes for buy and hold. Assuming both result in positive cash flow, what do most investors do?

Do you make more money in the end getting the longer term and smaller down payment - Or is a shorter term larger down payment better.

In one case you use more of your own money upfront, but do you recoup this because of paying less interest to the bank?

I am closing on my first house to live in. Purchased a short sale for 94K. I wanted to do 10% down with 15 year loan. I wanted to do this because I can afford it and want to pay less interest. But this is a starter house and I want to rent it out in 3-5 years when I upgrade. So should I go with a 30 year/ 3.5% down instead?

[David Beard]

Originally posted by Adam Craig:

I wanted to do this because I can afford it and want to pay less interest.

And please throw aside this canard about paying less interest. Think like a bank!! As a buy-and-hold investor, you are attempting to earn an attractive spread on the money you are borrowing from the bank. So paying the bank lots of interest is optimal, as long as you are earning even more on the underlying investment property. As long as you have solid positive spread (ie. borrow at 5% to buy a house that will net you 10% after all expenses and reserves), then you should be seeking to maximize your borrowing.

Just make sure that you have a strong ratio of gross rents-to-P&I of at least 3.0 (I like 3.50, personally), protecting your cash flow. To keep this ratio healthy, always go for a 30 year amort if possible.