Length of Loans for Investment Properties

[Will D.]

This is my first post, so I hope I am posting this in the correct place.

I have purchased 3 SFH in the past 10 months. I have purchased these homes with using a 90 day loan option from my bank, and then getting a home equity loan on the property once it is deeded in my name.

The home equity loan pays off the 90 day loan, and then I have a 10 year home equity loan. This 10 year loan has an obivious higher payment reducing my NOI on the rental properties.

For those that have been investing for some time, would you rather have a higher NOI on a monthly basis, or would you rather have the loan paid off sooner?

The 3 properties I have bought have been for the following prices:

1. $35,000 = Rented for $650 a month
2. $19,500 = Rented for $400 a month
3. $21,650 = Should rent for $525 a month

[Jon Holdman]

NOI, net operating income, does not include debt service. I think you probably mean "cash flow", which is NOI less debt service.

On your first property, NOI should be about $325/month over the long term. The payment on $35K at 6% for 30 years would be $210, leaving you $115 in true cash flow each month.

With a 10 year loan at the same rate, your payment would be $389, putting you in the hole $64 a month. In all likelihood, those hits come irregularly, say a two month vacancy or a new furnace.

As long as you're able to put in the cash when needed, you're building up equity faster with the shorter loan. If you're actually wanting the property to throw off some cash, you'll have to go with the longer loan. So, you choice depends on your goals.