Loan term and negative cash flow - Struggling with the concept...

[Nicholas B.]

Regarding small scale rental properties or I believe "buy and hold" is the term used around here (sorry, I'm new to all this).

I notice that a lot of investors mortgage properties for 10, 20, even 30 years - whatever it takes to produce a (sometimes barely) positive cash flow. It seems that a lot of them end up in a "one day, I'll be rich" scenario of waiting out the mortgage before they really have solid usable income from the rent checks. Maybe they put a couple bucks in their pocket, but in the mean time, they're paying thousands in interest and often run into difficult DTI problems when they go to finance something in their name.

Do people who have the disposable income ever intentionally enter a negative cash flow deal in order to get to the "I keep the rent $" phase sooner and save the interest? Or more importantly, why not?

I'll add an example in case I'm not really clear:
Let's assume an initial loan amount of $60,000, $3000 / year of taxes and insurance, and a rental income of $1200 / month analyzed over ten years. Assuming that repairs and maintenance will be paid out of pocket. Total income would be $144,000 minus the out of pocket expenses. Please bare with me for simplifying all of this to get to the point. 

• If I take a 5 year HEL at 4.115%, P&I = $1108 + $250(T&I) = $1358 x 60 months is $81,480. Then another 5 years of tax & ins totaling $15,000. Total investment is 96,480, leaving an income of 47,520. For the first 5 years, I'll have to float $158 / month totaling $9,480, but the next 5 years, I'll have $950 of additional income totaling $57,000.
• If I take a 10 year HEL at 5.365%, P&I = $647 + $250 = $897 x 120 mo is $107,640 total, leaving an income of $36,360. Each month, I'll have a positive income of $303, totaling the $36k.

Maybe I'm missing something. I guess I just wonder why I read so much about making "positive cash flow" leveraged deals, but nobody ever talks about just getting the thing paid off and then enjoying the income. This is something that I'm actually considering doing in the future, so feel free to save me from myself. Thanks!

[Bryan O.]

You are talking about 2 different strategies and preferences:

1) Get the property paid down as fast as possible. Use any extra income to shovel into paying down the debt, then having greater cash flow later and the comfort of knowing that the property can lose value in a crash, but that they will never be underwater. They sacrifice that cash flow now for higher cash flow later

2) Get as long of a loan as possible and use as much leverage as you can. This maximizes your cash flow at the start and leverage is a very large value add when property appreciates, but if the property value goes down you may not be able to sell it to get free.

Both strategies work, but they are both different risk profiles and mindsets. They accomplish different things at different times with the same ultimate goals. Do you care how much interest is paid when you aren't paying it? I am young(ish) and in expansion mode, so I prefer strategy 2 right now. As my risk tolerance goes down I will transfer to strategy 1 so I can "retire". Once they are paid down more, maybe I'll just hold the notes...

So tell me, do you like Apple pie, or Pecan? Because that is our discussion.  ;)