On more of a buy and hold type strategy…I’m wondering what type of mortgage term in years, (20 or 30 years), that most rental property owners feel is more advantageous to their strategies.
As a newbie closing in on a first deal…this is a big concern of mine.
Do you go for 30 years to minimize the actual amount of the payment per month?
Or do you compromise and go for 20 years so that you build up more equity?
I realize that each and every investment property is unique…was just hoping that a few of you out there could shed some >good< light on how to approach this important financing issue and it’s ramifications.
In response to your concern about building equity…
Print out an amortization schedule. There you can see how much money is going towards interest and principal. What you can do is make your regular payment and include some extra money to cover additional principal without making interest payments. I know you didn’t ask but I thought I’d throw it out there.
Every investor is unique and that is what will greatly determine the answer to this question.
If you are currently employeed at job and REI is part-time then paying on a 20 year note (or paying like a 20) is probably no big deal because the RE income is not as important as the equity buildup.
However, if this is going to be your career, then cashflow IS your income and the more the better. Heck, if they’d give out the new 40 year loans to investment properties, I’d be all over them!!!
Also, if you really want to get deep into the should/shouldn’t on this, figure the difference between a 20 year and 30 year monthly payment. Take that figure and compound it by what you think you’d earn if you invested that money into something else (another property for example). Then figure when that extra would pay off the note.
Another way to think about it. Figure your true interest rate (rate - tax benefits = true cost interest). Then figure your possible return on investing that somewhere else. If it’s more, then it’s a better bet to invest elsewhere besides the property.
I haven’t really seen this addressed much but if cashflow is king, shouldn’t the way to go be interest only?
Think about it, the typical scenario is to buy a property with a 30 year, after a few years, you’ve built up some equity in the property, then you refinance to take the equity out to use as a down payment on another property. If you don’t put the equity into the house, you could be putting it to use instead of having it tied up in the house for all this time. That’s assuming you can find a good use for it and that you are saving it.
Anyway, around here the prices are so high that deals barely work on a 30 year so it’s kind of a no brainer. The only advantage to the 20 year would be the slightly lower interest rate but again, it kills your cashflow if there was any to begin with.
for investment property I would go with a 30year. mainly to increase cash-flow. If there was a 40 year mortgage out thyere I would bite too. For my primary residence I would consider a 20 year.
Cash is king! Cashflow on the other hand, is important (at least in my book) but different people buy for different reasons. The last couple of years in CA is a good example. You could not cashflow a property, but if you held on to it for 6-12 months, then you could have had a 20-40% increase in value. Selling then would make up for any cashflow negative.
Consider your present and future goals of this investment and the next investments to come. If you need to spread your cashflow in other investments then personally… I would choose a 30-year interest-only. You can always pay extra towards principal or just enough to cover for the month. Now, if you want to get real savvy… then consider the Option Arm aka “Pick-a-Pay”.