15 Year loan on residential investment property - Have you done one?

Question

I'll be closing next week on a new rental property and went with a 15 year loan (at least for the time being) - 4 bed/3 full bath 2 blocks from the college campus here. Paid 180k for the place, ARV 230k (in this market) and looking at 20k worst case on the rehab, including full paint, rotted wood, refrigerator, trash, holding costs etc. Not my typical deal, but the location combined with the size, revitalization of the area and having some built in equity made it work. Got it from a wholesaler before he emailed it out or put it on his website - so I'm happy with the long-term predictability and consistency of the deal. It is on the threshold (using very conservative rents) as far as numbers go - but for the reasons mentioned I made a decision to go forward with it. It is a relatively low ROI for the immediate future - I'm ok with this, on this particular property.

So why the 15 year loan?

Two loans looked like this

30 year FRM @7% w/ 25% down, 1 Pt

15 year FRM @6% w/ 25% down, 1 pt

Difference in monthly payment ~$250. Loan balance in 3 years for 30FRM $131162, for 15FRM 117,259. Seems most places are letting you refi within 3 years for free, so that's the case on this one too.

Looking at a 3 year refi timeline it "costs" me 250/mo * 36 months = $9000. Difference in the principal balance in 3 years is $13903 - $9000 (minus the "cost") = $4903 in interest "savings" (ie: equity after subtracting out the "cost"). So from how I understand it, it "saves" me ($4903/36months) $136 a month in interest (so this is going to the principal, ie: equity) So if that's the saving then the cost seems like $250-136 = $114/month (or $4100 over 3 years). $114 a month isn't going to make or break anything (neither is $250). But in 3 years it lowers the P&I enough to get great cashflow. So from years 3+ the property is cashflowing comfortably, predictably and consistently.

So why did I do it? Depreciation gets me $6500/year tax deduction (at a 180k purchase price) . I'm in the 24-32% tax bracket (deductions will bump me out of the 35%) - so saving here. I should be all in for 87% ARV, which is great for this area, the turnover is so low it's hard to get anything here much less a 4bed/3bath. In 3 years, after a refi, it will cashflow great. So, maybe not a great deal on paper - but I think this is one of those where the timeline is slightly longer and the CoC return is lower upfront. Makes a decent tool for a HELOC as well since there is some built in equity. Also we should have minimum repairs/Cap Ex, since we've just completed a thorough rehab (roof is new, water heater, AC etc is all relatively new). I also need the cashflow 5-10 years from now, not right now, so I guess I'm leaving more in the property to ensure I have that.

Thoughts? And if you've ever done something similar?

Robin Simon · Answer

Think you are on the right track - as long as you are running the numbers on each scenario fully like you did above you are doing the right thing.  Huge value in the flexibility as well - w/o prepayment penalties and with the option to prepay "extra" as you go if you want is a valuable tool though, so you can get the lower pmt and longer term, giving you the option to pay down faster as you go (vs. a 15-year term where you don't have the option, you've locked yourself into the higher principal payment)

Darway Dalmeida · Answer

I understand what the 3 years principal rules are on Jeremy deals. Assuming rate goes down to a manageable rate in 3 years and the property can be refi on a preferrable rate.  However, If you are planning to have the property free and clear in a short amount of time, good idea. If you are trying to scale like the other gentlemen stated, it will become a bad idea for refi. You DTI will get you into trouble and could cost you more in the long run feeding these private /Hard Money lenders points and fees systems.

Jacob Stevenson · Answer

Most of our deals are 15 year.  We like being a little more conservative and if a deal is good at 15 years, when you have the option to extend it, it looks really good.

Jeremy H. · Answer

I debated this thought last night too - a couple of mine cashflow incredibly well at low interest 30FRMs. At a 15FRM they'd still cashflow well plus the interest savings.

I think there is a point where starting with a 15 year then refinancing may make sense

Jeremy H. · Answer

It seems to me there is a breakeven point where a 15 year mortgage may make sense up front, then refi. Now why is there a breakeven point? Because of the difference in the interest rates. Now it's doing to the math to see where that point is and if it makes sense from an ROI standpoint

Ezra Henderson · Answer

I’ve got 10+ rentals on 15 year mortgages, but most of those were bought back when rates were lower.

Eliott Elias · Answer

15 year loans will kill your cash flow. If you goal is to own 10- free and clear it's a good strategy. But if you're scaling at a massive level stay away. It it is catalyst.

Jeremy H. · Answer

Exactly - this was the reason I almost went with the 30 FRM - it gives you that option and that is valuable like you mentioned. It will cashflow either way - just $250 less with the 15 FRM.

Although I do understand it's always better to have your money today rather than tomorrow - the 250/mo isn't much. If it was $2500/mo or $25000/mo I'd start looking at the time value of money and opportunity cost. But what, realistically, will an extra $3000/year do for me? Maybe I get 10% return in the market - so I make $1000 over 3 years...not enough to really matter one way or the other

That's the thing with this deal - the ROI is just lower due to the location and price. I can guarantee if it was on the market or emailed out it would have gone for higher. On paper, it doesn't look like my typical deal which is why I'm here - seeing if anyone else had done the same or if I am pissing in the wind on this one

Joe Villeneuve · Answer

General G. Patton once said that he never retreated because he didn't want to pay for the same ground twice.

15 Year loan on residential investment property - Have you done one?

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