Any Thoughts On 30 versus 15 Year Amortization?

[John White]

Good Morning All...

I signed  contract to purchase my first rental property.  It's a townhouse (i.e. two floors on each side) style duplex, and is the only multi family property in this neighborhood (the entre town is predominantly single family homes).  Because of the location (centrally located to the main highway, supermarkets, restaurants, major mall), and the quality of the property (definitely higher end property, for a rental), I suspect that I'm not going to have a great deal of difficulty renting either unit, when one unit does become vacant.  Each side is rented for $1600.00, and neither existing tenant wants to leave.  I've reached the point where I'm debating on a 30 versus 15 year amortization.  Obviously, the 30 would result in more cash flow, from month to month.  The 15 year would obviously build equity a whole lot faster (giving me the ability to leverage the asset a couple of years down the road), and would still result in a positive cash flow (just to a much lesser degree).  The tenants pay for all utilities, including snow removal. Beyond the mortgage, my expenses include taxes ($6K per year), insurance ($1200 per year), and obviously any capital expenditures or routine maintenance that comes up. 

I'd love to hear some opinions on how other investors treat this.  I always assumed that everyone opted for a 30 year note on an investment property, just to keep the cash flow as positive as possible.  I just figured if a 15 year allows me to still stay cash flow positive, that perhaps it's worth considering.  Any and all feedback is welcomed.

[Brett Russell]

@John White , everyone brings up good points.  You need to figure out what's important to you.

One benefit of 30 year amortization is it gives you flexibility.  You can always choose to pay more than the minimum payment.  If you take the 15 year amortization payment and apply it to a 30 year amortization loan, it won't get paid off in the same amount of time because of the interest rate difference, but reasonably close.  But, if you have unexpected expenses or happen to need more cash flow for a month (or more) you can always go back to the minimum payment on your 30 year loan, but you won't be able to convince the bank to let you skip some payments if you had opted for the higher 15 year payment.

So, how much is that flexibility worth to you?  Play around with the numbers.