Is a 30 year loan really the best loan for a rental property?

[Dan Richter]

It seems that the general consensus for a rental property loan would be a 30 year loan, and I used to agree. The idea is that you can use the cash flow to pay the loan if you want to, or use it for a higher returning investment. Again, I used to think that too. But in every simulation I run, the 15 year loan is giving me a higher net worth after 5 years than the 30 year loan. My goal is net worth, I don't care about cash flow. Can anyone prove that a 30 year loan would better meet my goal? Because I can't shake this idea:

Let's look at a $100,000 property with an $80k financed. Let's say it rents out for $1000 and has $500 per month in expenses (not including mortgage.) Let's also say that a 15 year loan is at 4%, and the 30 year loan is at 5%.

With a 30 year loan, you pay about $430 for the mortgage, so including expenses, you cash flow about $70 per month. Also, $96 of the principle is also paid off, so in total, in the first year, you make about $2000 on your $20,000 down payment, a 10% ROI. I'm not going to include appreciation.

With the 15 year loan, you pay $591 for the mortgage, so including expenses, you cash flow about -$91 per month. But this time, the principle is paid off $325 in the first month. In the first year you will make about $2900 on the $20,000, which is now a 14.5% ROI, significantly higher.

[Russell Brazil]

You are using the assumption that you only need to pay the minimum loan payment on either product.  You can get a 30 year loan, and pay as much on it as you would if it were amortized as a 15 to create a similar 5 year net worth if you so choose.

The benefit to the 30 year loan over the 15 in this situation is flexibility.  Life happens.  Maybe you get hit by a car and are unable to work, suddenly that cash flow may seem more important than building your net worth.