Should I expect to cash flow when using a 15 year mortgage?

Question

I want to buy a duplex but went to use a 15 year mortgage but it's hard to cash flow with a 15 year mortgage. Should I just be ok with the equity growth?

Doug McLeod · Answer

Depends on your goals, market, and risk tolerance.

If your goals are cash flow and appreciation with a 5-7 year time horizon, no need to pay down loans faster.  If you are looking to use equity pay down as a savings vehicle over the medium term with higher cash flows longer term once the loan is paid off, then you may want the accelerated payments.

In the local markets I'd buy in, no 1-4 unit I've evaluated would cashflow with a 15 yr mortage.  In a market where rents are 1.5-2% of prices, then maybe it works.  But not at .9-1.3% rent/price.  Only one of my SFRs is a long term keeper.  The others I expect to sell or 1031 in 3-5 years.

Some feel it is less risky to own free and clear as soon as possible (eliminate risk of default/lender foreclosure and have increased cash flow - but lots of dead equity).  Others feel it is less risky to maximize leverage - highly leveraged property is less attractive to lenders considering foreclosure, divorce lawyers, and other litigious types (less of own money/equity at risk, still some cash flow, and much less dead equity sitting around).

Pavlos Kasselouris · Answer

Practically negative cash flow means that every month you will have to put from your pocket a certain amount. If we take into consideration any unexpected situations the mortgage payment alone with property taxes insurance etc will be huge!

I am in favour of positive cash flow no matter what! The key is not to pocket the extra cash but use it either to grow, as a downpayment on the next one, or paydown your mortgage essentially turn it to a 15 year mortgage by yourself but without having the added pressure...

If you do mockup calculations of how to grow as fast as possible you will see that leveraging is the way to go. In order for me to analyse a specific investment property I calculate always putting down 20% and having a 30 year mortgage. I have to be able to compare apples to apples. Then if theres on the table another creative financing deal I run the numbers with that in mind but positive cash flow is always on my goal.

Nick L. · Answer

@Nick Stango

There's really no value in a 15 year mortgage if you have a choice.

If your goal is to pay the place off as quickly as possible, you might as well take a longer amortization and make extra payments. The small bump in the interest rate on a 30yr is your "insurance" for being able to reduce payments in a financial crisis.

But most investors will stretch out their payments as long as possible to maximize leverage and cashflow.

Pavlos Kasselouris · Answer

@Nick Stango

It all depends on your goal and your risk tolerance. For example the way I see Real Estate Investing, is 1) set an income target, 2) calculate how much real estate units you will have to own free and clear in order to reach that target 3) Grow as fast as possible to that point by leveraging and maximizing your ROI (thats where your calculations will show you that 30year mortgages are better) and then 4) start the pay down process (this is where your interest savings will occur like using a 15 year mortgage)

I hope I helped

Nick Stango · Answer

What about a deal that has a negative cash flow on a 15 year mortgage? Should I try to get at least a break even deal if I'm not living in one half of the duplex? Going with a 20 or 30 year sounds like it might make sense since I can throw money at the principle when I can to build equity, I just want to make sure i don't lock myself out or getting more property down the road, I want to build a portfolio as quick as possible, so I need to keep as much money as possible liquid.

John Thedford · Answer

You can "adjust" your cash flow by making a larger down payment. Run a couple of amortization scenarios to see the difference. There are advantages to 15 years and disadvantages depending on your goals. More importantly than the time frame, if you are buying as an investment the most important detail is whether you are getting a good deal.

Trevor Ewen · Answer

@Nick Stango

There are some lenders who only offer 15 year mortgages (Navy Federal Credit Union comes to mind). If you are set on a lender, then you have your reasons.

I tend to prefer a longer timeline. If I am feeling motivated, I can pay it off faster (additional payments go to principal). But I am not forced to do that if times are tough. Like @Doug McLeod alluded to, it's all about your own risk tolerance and goals.

Should I expect to cash flow when using a 15 year mortgage?

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