15 year or 30 year rental property loan?

Question

I’m looking to house hack a duplex as my first rental property and I’m stuck on which type of loan to use as a 24 year old with next to no credit and also the length of the loan.

I’ve heard 15 year has lower rates and you can pay your house off more quickly.

But a 30 year loan will free up more cash flow to put towards your next purchase to build up your portfolio.

Any personal experience? Is it preference?

Jeff Copeland · Answer

Here's the thing: You can always take out a 30 year fixed loan and pay it off in 15 years. You can't do the opposite.

The 30-year term improves your cash flow if/when it's needed, and gives you more flexibility.

Karl McGarvey · Answer

Go with the 30yr and maximize your leverage. Keep the cash in your pocket monthly for unforeseen expenses. IF you want to pay the principle down and pay the loan off in 15yrs you still can, but you don't have to if you prefer to use the cash on a second or third property.

Scott Crowley · Answer

First, I would evaluate your credit and DTI situation. If you basically have no credit as you say, I would focus on what your strategic plan would be to build it. We live in a credit-based system, so access to conventional loans and lines of credit is heavily driven by your worthiness. If you haven't done so already, calculate your DTI(or better yet, speak with some lenders in your area) and insure you would be in a position to show you have the ability to pay back the loan. A good lender can discuss any ability to factor in the tenants rent as income for you as well.

With all that being said, none of this is necessary if you don't already have good foundational financial principles in practice to begin with. I only mention this because if we are 24 with no credit, does that mean you have recently decided to take control of your future and begin a wealth-building journey? Does it mean you recently graduated college and just never thought to care about your credit to this point? May seem like a moot point, but it is critical to understanding your basis to begin with.

Getting to your question now: I believe @Jeff Copeland hit it dead-on with this. The 30-year is the way I would go for the exact reasons he stated. Speaking from experience on this one. My current primary is on a 20-year because my goals and mindset about investing were completely different almost a decade ago. Now, I'm kicking myself because I want to turn this into an investment property and have an awesome rate on this thing, but my P&I is still higher than I would like or could have had on a 30. Yes, I've pushed more equity into this thing quickly, but I would much rather it be liquid capital.

It's all about what your goals are in doing this in the first place though.

Kenny Smith · Answer

@Allen Bannister

If you're looking to build your portfolio and buy more properties, leverage someone else's money as much as you can!  Will leave more capital to buy more properties.

I think the first step is simply to figure out what your RE goals are and go from there.

Best of luck!

Bob Stevens · Answer

Its all about the numbers, just do the math,  Good luck

Bud Gaffney · Answer

@Allen Bannister exactly what Jeff said. Flexibility of the 30 year note and you can pay it off faster as you make more $. Or borrow against the property and keep it rolling.

Eliott Elias · Answer

30 year is better, free up your cash. Only way I would do a 15 year is if it's the only house I purchase ever. Other than that free up your capital every month to work on other projects.

Henry Clark · Answer

Side note to the above discussion. Will the duplex need work or can you value add extra Bathroom or bedrooms to each unit?  If so let your lender know going in you would like say a 3 year ARM, to convert to long term. If you have enough credit add on extra loan capacity to finance the value adds.

A.  If you don’t have enough credit get your parents to co-sign just on the 3year ARM.  I’m against co-signing.  If you do the right moves your valuation and equity position should go up with the value add and rehab.  Before you do the 30.

I personally think interest rates have to go higher.  So you may have a higher rate on a 30 than today. You always want to do long term financing for long term assets.

B.  I would hate selling my first good investment.  But live in it for two consecutive years out of five and sell it.  You don’t have to pay capital gains.  Your 24.   This will get you some cash so you might be able to leverage more deals quicker.  This will speed up your snowball.  Only do this if you plan to grow.  Otherwise keeping the duplex is your best investment.

Jaron Walling · Answer

@Allen Bannister I challenge you to NOT USE credit cards! I think it's pretty cool you haven't and still have a 700 score! How many people can say that?... You'll qualify easily for a 15 or 30 fixed rate with a good DTI. Don't over think it. REI is mostly about numbers and following strategy. House hacking is effective in numerous ways the best aspect will always be REDUCING you living expenses, gaining PM experience, and handling maintenance and repairs.

I got my first CC when I was 21 and trust me I've gone in and out of CC debt. It really sucks. Wasn't until I was in my 30's that understood REI and how to leverage it more effectively.

Theresa Harris · Answer

Jeff has the best suggestions-get a 30 year loan and if you want to pay it down faster, you can.  It really depends on what your goals are. If you want to build your portfolio, the more money you get the better (30 year loan).  If you are closer to retirement age and want higher cash flow and less debt when you retire, get the 15 year loan.

15 year or 30 year rental property loan?

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