Shorter Mortgage vs. More Cashflow

[Darsh Patel]

Hi Everyone, 

I wanted to get the community's thoughts on a debate I am having. I can buy a rental property at either a 30 year or 15 year fixed mortgage. The 15 year obviously means that I pay the property off faster but it also means that I have a larger monthly payment and thus have less cash flow month to month. Is it better to do the shorter mortgage and sacrifice the present cashflow or take the longer mortgage and generate more cash flow? 

[Brandon Williamson]

I would ONLY do the 15 if you are getting a lower interest rate.   You may decide for the reasons others have stated that you want to get it paid off faster and the 15 is for you.   Here are a couple of negatives to doing it that way though.    1)  Something will go wrong at some point.  (vacancy, emergency repairs, tenant takes months to evict, rents could drop in your area slightly)  If any of that stuff happens and you have been taking the small amount of cash flow you are more likely going in the hole on your investment at least for that period of time.    2) If you plan to buy more properties and take financing on them the lender is going to qualify you based on how much you HAVE to pay in payments every month.   Nothing is stopping you from paying extra on the 30 year loan, you can even automate this with your bank, however you can not just go back later and reduce your payment to a 30 year qualify for another property.   Refinancing is expensive and the rates could be higher in the future.  You are tying up a substantial amount of buying power on the 15 year loan so if you want to keep acquiring properties keep your monthly debt load as low as possible using the 30.     

If you have plenty of money to play with (and to cover your butt with) and plan to use the cash flow to live on when the loan is paid off you might want to tough it out with the 15 but if you are going to be working and investing for a while the 30 will give you more flexibility.