ready to buy 3rd property, 15 or 30 year?

[Rachel Degennaro]

So, I did the housing hack, buy a duplex, live in one, rent the other out, and it's going really well so far, I'm super happy I finally took the plunge.

I got an insane deal on the duplex, although it did need some work, nothing too major. Between savings and a small hard loan (that I just paid off) I was able to buy, free and clear. So now I own, get paid to own and don't owe the bank anything.

I'm ready to buy again, this time I was thinking of a SFH, I have a bit in savings, not enough to buy another house outright, so I will probably go the bank loan route.

My question is, I see a lot of investors talking about putting the least amount of money down and doing the traditional 30 year loan to increase your monthly cash flow and free up cash to do it again, and I get that, because I am trying to collect more than a few houses, my problem with that is, even though you are putting a few extra bucks in your pocket every month, in the long run you are paying considerably more to take out such a long loan vs a 15 year. 

So wouldn't it be smarter to pay it off quicker and for less interest and own it outright then to drag it out for so long and ultimately pay more over the life of the loan, or am I missing a key factor in this?

Sorry if it seems like a dumb question, I am still new and do not know any other real estate investors/landlords personally so I am just trying to find the best route.

I still work full time and plan to until I can afford to quit, also I wouldn't mind making the next property my primary residence if it got me a better rate and I can then rent my current house out..

[Christopher Phillips]

@Rachel Degennaro

It's not a dumb question...

What you are doing is thinking about investment properties from a cash mentality. If you buy a TV, you wouldn't want to put it on a payment plan because that plan would cost you interest and raise the overall cost of the television.

Investing isn't the same way. Investing is about using leverage. When you use the power of leverage, you can buy more properties. Your analysis is what determines if you should buy or not and what makes sense. If it cash flows, buying with leverage allows you to buy more properties, thus building long term wealth.

Really basic example:

Let's say you have $10,000 cash and you can go out and buy 1 single $10,000 house with that. (yes, I've seen homes selling for that).

Instead, if use the power of leverage and you put down only 10% or $1,000 and borrow the rest, assuming the rental property cash flows, you can then go buy 10 homes by putting down $1,000 on each and borrowing the rest. Now you have the power of 10 homes instead of one.  That means 10 homes generating cash flow, spreading your risk of maintenance issues or potential vacancies across 10 properties instead of putting all of your cash into a single $10,000 property. And, most importantly, when those 10 homes are paid off, you'll own $100,000 worth of property versus still having a single $10,000 home. That's the power of leverage.

When you pay off your properties and not use that equity to acquire more properties, you are essentially letting your money go to waste. That works perfectly for you primary residence, because that's more like the TV. But for your investments, you want your cash and equity positions to be working for you to acquire more properties.