How long should your mortgage be for a rental property

[Yacoub Shack]

Hi looking to getting my 1st property. I’m trying to understand how long should my loan term be I have been pre-approved for 30-yr loan but don’t really understand how it will make money. I know to make sure the rent covers the mortgage and try to get cash flow on that but with that being said I won’t really make any money into the 30yrs up. Help me understand where I’m wrong or what I should be doing.

[Kevin Sobilo]

@Yacoub Shack, you make money 3 ways on a rental. The first is positive cashflow in your pocket after all expenses are paid. Second is appreciation (the value goes up in the market or you improve the property). Third is by paying down the principle on your mortgage.

So, even if you break even on a rental with your expenses over a long period of time you should make some money because of appreciation and paying down the mortgage.

However, a good rental should also generate some rental income in your pocket. How much depends on the market. I would say $150-300 per month would be a typical range.

When figuring out what your expenses are you should account for things such as repairs, capital expenditures, and vacancy. Repairs is self explanatory. Capital expenditures are parts of the house that reach the end of their useful life like a roof replacement. Vacancy is the lost income you have when your unit sits vacant which is will sometimes. For example if your tenant leaves every 2 years and it takes you 5-6 weeks to find a new tenant you unit is vacant around 5% of the time.

I typically estimate 5% for each of those categories.

So, if you buy a house and rent it for $1000 per month with a $700 mortgage payment (taxes and insurance included), then you also budget $50 for repairs, $50 for capital expenditures, and $50 for vacancy for a total of $850. That leaves you an expected cashflow of $150 per month.

Also, keep in mind other possible costs such as utilities. I pay any utilities that are provided by local government such as refuse, sewer, etc. It varies area to area, but if its provided by the government and it isn't paid it becomes a lien on the house. So, I pay those directly and don't rely on the tenant. 

You question about loan length is a different issue. The longer the loan, the greater the cashflow in your pocket, but the slower the paydown of the mortgage principle. So, length of loan changes how and when you receive the profits you're making.