Why a 30-Year Loan is Better than a 15-Year Loan on Rental Properties

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  • Agreed. I’m looking at a $120K loan, and the difference is nearly $300/mo between the 30 yr term and 15. Even though the property should be very cash positive, an extra $3600/yr will help protect against repair cost or vacancies. I’m not counting on increased value, just the good cap rate. The cash can always be used to pay the mortgage down sooner, if not used for the next deal.

  • The timing of this post was perfect. I’ve been considering the terms of a recent purchase and was trying to decide what would be better a 15 year or 30 year mortgage. Your post helped clarify for me the advantages of the 30 year over the 15 year. On the surface 15 year seems much better, but after reading this I realize now that’s not the case.

  • We have done a 20 year ARM with a fixed rate for 5 years on our most recent deal. It seemed like a happy medium but now I’m not so sure. What do you think? How easy is it to change the terms? On our next loan I think I’ll consider the 30 year ARM as you suggested. That will make it easier to build up our emergency fund or to invest in a new fix and flip. This post really gave me some good practical tips thanks!

    • It is not very easy once you sign the docs to switch. You can ask your bank. I think the longer amortization the better.

  • As you get more and more properties, you will find that you cannot get any loans, unless you get commercial loans or get more creative.

    Once you get a 5-unit or more, it’s commercial. Once you get 10+ mortgages, it’s commercial. Even anything over 4 mortgages is a bit tough to get Freddie/Fannie loans. Some banks will not do them,

  • Very timely article and great advice as I am working with a portfolio lender for my next rental. I went with a 30-yr. fixed rate on my first rental and am excited to go with a 5 or 7 year ARM amortized for 30 years on this next one. Wish I had known this information before! Thanks so much Mark!

    • Thank you Michelle! A 30 year fixed rate loan is not that bad!

  • Great post Mark. I never thought about using a 30 year ARM but I really like the way you think. If you have a strong cash flow then the 5 or 7 year adjustment really won’t affect you.

    I would rather have the cash today.

    • Thank you! Most people bash ARMs, but they really are a great loan if used right.

  • Bayard P. says:

    Would this apply to people buying properties through commercial refinancing? I feel like building equity quicker (15 year) would be more ideal for my situation. It’s easier for a Canadian to buy mulitple properties in cash then refinance them after.

    • I think you have to look at your situation. It is easy to add principle to the payment to increase the pay down.

  • Hey Mark,…

    Is a rental property appraised the same way as a primary resident / owner occupied home…?

    The property in question has been rented for 36.4 months solid with cash flow and has room for improvement in terms of cash-flow.

    Howard

    • Hi Howard, It depends on what type of rental it is. If it is a single family home it will be appraised for its best and highest use which is a single family home. If it is a four unit rental then it would be appraised for income as that is its best use.

  • Duncan herbert says:

    In Canada, all mortgages are ARMs with a 20 or 25 year amortization. No such thing as a 15 or 30 fixed loan. the long term/ fixed loAn would be 10 years which very few people would even touch because their interest rate would be 4.5 vs 2.75 on a 5 year term.,
    Mark, what you would consider to be a fairly short ARM at 5 years, Canadians would consider that as conservative long term for a mortgage. Personally though, I think that your 5 year arm with a 30 Year loan is the way to go for Canadians. Now if we could only get our average house price down below 440000$.

    • Wow, that makes it very tough. It’s a little surprising prices are that high with loan terms so short.

  • Thank you for the information. If you want to sell the property in 3-5 years and get a bigger property later, which option is better for the short term property- 15 year or 30 year?.

    • I think a 5 year ARM is the best option because it has rates as low as 15 with a much lower payment.

  • Hi Mark… I’m late to the party… maybe too late. What about when you turn your current home that has a 15 year mortgage (13.5 years left) into a rental property. Should I refinance it to the 5 year ARM or just leave it alone. Current rate on my 15 year is 2.75%
    Thanks,

    • Mark Ferguson says:

      depends on the numbers and cash flow

  • vishnu raheja says:

    Mark, do the lenders always require w2 for last 3 years to qualify for best rate mortgages?
    I have three rental homes on 5Arm under commercial loan and want to get them.under residential 30yr mortgage.
    Second question.. I got an email from AllStateFinancialUSA that they do finance rental propty without W2 amd base it only on rental income. Thats the first I have heard of..is this legit in case u hppen to knowiot this company…
    Maybe the larger question is, is it wise to go with small name lenders vs big banks or credit unions?
    Thanks Mark..love your posts!

  • Deciding between a 15 and 30 yr can also vary greatly depending on your current life situation. For myself, I have a 2 year old son (2nd on the way) and my goal is to have a cash generating machine just before he hits college age. To do this I am using 15 year loans. Why? Because I don’t need the cash right now, but when its time for college tuition season… these properties will be churning out boatloads of cash as each mortgage will be paid off and rent will be straight cash (less taxes misc expenses etc).
    So the choice between 30 and 15 isn’t always so clear. If you need cash now, go for 30. If you want to retire sooner, I’d go for 15 and as they are paid off your life ability to retire early because much more clear.
    Additionally, you build up Equity MUCH MUCH faster with a 15 yr loan vs a 30 yr loan. So if for any reason you are forced to sell after 10 yrs, you will have built up far more equity in the 15yr loan home vs a 30 yr loan home.

    • Scott Schultz says:

      totally with you on this, and with equity, allows access to Lines of Credit, giving you access to your own lower interest cash for acquisition, we use our lines to buy, then finance them after repairs, kinda like the BP “BRRR” but instead of seeking transaction funding at 10+% mine is at 4.5% and no points, and I just transfer funds no asking permission. it allows so much freedom.

      • Mark Ferguson says:

        For sure

  • Scott Schultz says:

    much of this depends on your needs, I do my calculations on 10 year amm with a minimum of $200/mo positive, but do 3/1 commercial notes with 15 year amm. I dont need the cashflow now but want it later. I also only want about 25 properties, so that will not be a any problem for lending. we also buy with an ARV at minimum of 40% above our all in cost, those buying at retail or slightly below and take an 80% mortgage for 30 years are taking a lot of risk if the market shifts and they need to liquidate in the first 12 or so years, as the principal pay down does not really kick until about 10 years in, so that a little hope and pray that markets will go up, a little too risky in my book. all the talk on the pod casts about zero to 20% down for 30 years is great assuming outside forces dont change, and all goes well, but an awful lot can happen in 30 years.

    • Mark Ferguson says:

      I think you need to buy at least 20 percent below market. That builds in about 40 to 50 percent equity. Over 30 years prices will go up unless you are in a completely depressed area.

  • Great article. It has definitely opened my eyes on considering ARM products vs just 15 or 30 year loans.
    Furthermore, you stated “Remember that you see no real benefit to paying off your mortgage early unless you pay off the entire loan, refinance, or sell.”, however, wouldn’t you be saving on interest payments if you pay off the principal quicker? Let’s say you pay $300 extra on the principal each month, that’s $3,600 a year that you’re not paying interest on or am I looking at this wrong?

    • Mark Ferguson says:

      You are right that you would be paying less interest, but my point was that you are still making the same payment and you don’t see that benefit of paying less interest until you sell, pay off or refi. it is only a paper advantage until that point.

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