Financing a rental with 15 or 30 yr mtg?

[Jim Stardust]

It's my first rental property, can afford both 15 yr and 30 yr (with the appropriate down payment) financing. At 15 yr, I anticipate the property will be slightly cash-flow positive, with 30 yr, there's a lot more cash flow obviously. The property is around 200k and I don't anticipate there will be a lot of appreciation in the near future (3-5 years - the time frame I anticipate holding it). The money will otherwise be sitting in a money market account...

[Bill Gulley]

The term in any mortgage product is designed for the portfolio management of the investor.

There are only two instances, IMO, where it makes more sence to take a 15 yr. fixed over a 30 yr.

1. Where someone else is basically paying your mortgage. I'm not talking about a tenant. The militaryand some companies, colleges, churches or other employment contracts provide housing allowances or payments. They may provide payments up to a certain amount and if hosuing costs are less, they only pay the lesser amount. So, if you can take a 15 yr. note and have it paid under those circumsatnces you'll build up equity quicker.

2. The other instance where a 15 yr could be better is when the borrower has no self control and is a poor money manager but has sufficient income to pay the obligation!

In ALL other instances, take the 30yr. The 15 has a lower rate, but the interest is either deductable for most owners or is expensed for investors and the additional principal paid from the difference between the 30 and 15 will reduce the interest costs at a faster rate than paying the 15 yr, everytime.

If you have to look at the property and the cash flow analysis as a deciding factor, the deal is not a deal. If you have to take a 30 yr to squeak by on cash flow, the deal is too thin.

Even if your money sits in a money market, it is available for other investments. If something in your life goes wrong and you need money for a budget, having an obligation to pay amortized for 30 yeras will be better than one on a 15 year required payment amount. Your obligation to obtain other financing will also be less with the 30 year to obtain other loans, even a car loan!

So long as you have the right to pre pay your loan without penalty, always take the longer obligation. You will generally not see a prepayment penalty in a residential loan, commercial is another issue...especially SBA deals. Good luck.