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

[Jeremy H.]

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?