Help me chew this to the bone - 30 year loans and ROI

[Abe Osman]

Hello all, I hope I selected the right sub-forum! 

Im happy to report that within 2 months of starting my REI search, I will hopefully be adding 3 more investment properties to my portfolio within the next 30 days. I must like the stress, because I keep adding more when I get bored!

I need help analyzing something. Its something that goes against my own beliefs up until now, but the numbers just dont lie. The epiphany is that using a 30 year term for an investment deal is a far better way to go than ever paying cash for the deal, even if you can, and what strikes me as most interesting, even when compared to a 15 year term. I am a HUGE believer that a 15 year mortgage for my own personal residence is the only way to go, but this steadfast belief in the shorter term has been shaken when comparing investment deals. 

The long and short of it is that an investment property must be viewed as a business. And any successful business owner will tell you that the key to long term success is to lower overhead. The only way to lower overhead in REI is to take the longer term. So I put together the data below, using one of my pending deals. Its nothing to write home about, just a standard 100k house that rents for 1k a month, SFR, Etc. For simplicity sake, my calculations exclude vacancy and some other monthly calculations, and they are irrelevant to this discussion so please ignore that.

This is not a question that has been asked many times here before, Cash, 15 or 30. This is me asking you, WHY would anyone NOT use a 30 given that the returns are so much higher in almost every way. Convince me to pay cash for this property or do a 15 year term, show me what I have missed? 

It takes me 11 years to get my investment back if I pay all cash, approximately the same on a 15 year. But only 6 years to get back the outlay on a 30 year. For the returns on the 15 year to catch up to the returns on the 30 year, you have to hold the property for 21 years! 

Assuming that flipping the property is not the goal, but to hold it for 5-7 years and then sell in favor of bigger and better, what have I missed? My data: 

Thank for you in advance for any insight! 

Abe 
Los Angeles, CA 

[Steve L.]

All of your math checks out fine to me.  Although your expenses are really low.  

The easiest way to add rocket fuel to your buy-and-hold portfolio is to buy properties that have more equity to start (eg: buy under market). You are projecting your total cost to be 116,000 and the ARV to be 105,000. Your basis being 9,000 above the market value.

Instead find a property with the same purchase numbers except make sure it is worth 150,000 after you have it performing. Refinance it at 75% in 12-months. Now you can borrow 112,500 on your total cost of 116,000. Your IRR will be much better. Do that 10x or 100x and it's exciting.

I closed on a mixed-use property in Dec 2014.  The landlord was collecting under 2,000/month in rent.  I paid 180,000 + 50,000 rehab.  I brought rents up to 5,000/month.  It just appraised for over double my total cost and I am now refinancing it and will get all my money plus some spending cash out.  You can do that type of deal an infinite amount of times because all the cash comes back.