When investing in rental properties you have to be very precise with your math. The numbers have to be right for the rental property to make consistent cash flow every month. One question I get asked a lot is “ Should I get a 15 or 30 year mortgage for my investment property?” Both have their advantages and disadvantages. In this article I will be discussing the pros and cons of a 15 year mortgage as well as a 30 year mortgage.
As you can see from the info graphic above, a 15 year mortgages has better rate and it saves you a lot of money that you would of spent paying for interest. You can also see that the 30 year mortgages has a lower money payment, which is a big benefit. The 30 year mortgages give you the flexibility that can help you scale your business drastically.
Being a real estate investor, one of the things I look for in a property is its ability to provide me with positive cash flow, the more the better. A rental property with positive cash flow can help pay for the next property or investment.
Which one is better a 15 or 30 year mortgage?
That all depends on what kind of a real estate investor you are. In this case we will be talking about buying rental properties that produce a good positive cash flow, that we will hold for a long period time. The goal is to buy as many rental properties and have them produce a lot of positive cash flow.
Ok lets get to it.
15 Year Fixed Mortgages Benefits
Here are some benefits that a 15 year mortgage offers vs a 30 year mortgage.
- Pay less interest during the life of the loan
- Mortgage free in 15 years
- Lower interest rate on the loan
With a 15 year mortgage you will pay a lot less interest during the life of the loan/mortgage. As you can see in the graphic above on a $150,000 property with a 15 year mortgage you will pay $46,350 in interest, instead of $123,610 with a 30 year mortgage. Thats a huge amount of money you will save, a total of $77,260. ( Click Here For The Best Real Estate Calculators)
One other benefit of a 15 year mortgage is that it will be paid for in 15 years:) You will have the property free and clear a lot sooner than a property with a 30 year mortgage.
Best of all the interest rate you will get on a 15 year mortgage will be a lot better than the interest rate on a 30 year mortgage.
As you can see there are some good benefits when it come to a 15 year mortgage. These benefits are great but there are some negatives as well that come with a 15 year mortgage.
Negatives of 15 Year Mortgage
- High Monthly Payments
- Smaller loan amount
The biggest negative of a 15 year mortgage is the high monthly payment. With a high monthly payment on a rental property, your positive cash flow will be a lot less. My goal for every rental property that I buy is to have as much positive cash flow as possible.
A lot of banks will give you a smaller loan amount on a 15 year mortgage than on a 30 year mortgage. A high monthly payment will make it a lot harder to pay, you will need a larger income. This is not always the case, you can shop around and find better deals.
Now lets look at the 30 year mortgage and the benefits that it provides. I use a 30 year mortgage on all the rental properties I buy. It is very beneficial in my case.
30 Year Fixed Mortgage Benefits
- Lower Monthly Payment
- More Monthly Cash Flow
- You can buy more real estate. (Debt To Income Ratio)
My favorite benefit of a 30 year mortgage is that it provides the lowest monthly payment. With a low monthly payment you will have a lot more freed up cash to buy more real estate. This will make it a lot easier on the bank when you ask them for another mortgage.
More cash flow always puts a smile on my face. With a 30 year mortgage your monthly cash flow will be a lot more. The extra money every month can be saved and used to buy another rental property or it can be used to pay down another mortgage on a different property. One thing I like to do is build a emergency fund for repairs, vacancy, and evictions.
When buying rental properties, the bank looks at your debt to income ratio to determine how much you qualify for. This is where the 30 year mortgage shines. With low monthly payments your debt to income ratio will be lower, this will make it a lot easier to get more loans and more properties.
At a first glance the 15 year mortgage looks better, you get to save a lot of money over the life of the loan and best of all your property will be paid for in 15 years instead of 30. In my opinion these benefits do not out weight the benefits that a 30 year mortgage provides.
I will take a 30 year fixed mortgage over a 15 year fixed mortgage any day when buying long term rental properties. With a 30 year mortgage your money will not be tied up as much as with a 15 year mortgage. It is a lot easier to get five or ten 30 year mortgages than it is five or ten 15 year mortgages.
I like having freed up funds that I can put to work in more rental properties or other investments that I choose. At the end of the day, do you research and find with one will work best for you and your business.
What type of loan do you use when buying rental properties? The 15 or 30 year mortgage? Please leave a comment below.
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