Here are three things to consider when choosing between a 30-year fixed rate mortgage and a 15-year fixed rate mortgage on an investment property:
1 – Cash-Flow Considerations
A 30-year mortgage carries a lower monthly payment and therefore is more likely to result in positive monthly cash flow. The less money you pay out each month, the more likely you are to achieve and maintain positive monthly cash flow. Positive cash-flow reduces your risk of default in case the tenant stops making their rent payments or in case the property goes vacant for a while. For this reason, a 30-yr mortgage is generally less risky for investors vs. a 15-yr mortgage.
2 – Rate of Return Considerations
A 15-yr mortgage saves you money because you pay less interest over time. However, is your goal to save money or make money? If your goal is to make money and improve your rate of return on investment, a 30-yr mortgage may be a better option for you. Although you’d need to run the numbers in each case to determine which option would produce a higher rate of return, you’ll typically find in favor of a 30-yr mortgage. That’s due to the impact of positive leverage on your investment returns.
3 – Investment Objectives
Investing in real estate is not always purely a numbers game. For example, some investors would be happy earning less of an investment return, and experiencing less financial liquidity with a 15-yr mortgage because they value the tangible nature of owning real estate property free and clear. A 15-yr mortgage pays off in half the time, and it would result in higher cash flow and less cash-flow risk in the future when the loan is paid off (assuming you still own the property at that time).
As you can see, there’s no “one-size-fits-all” strategy when it comes to investing in real estate. Contact me for more info or to explore your options!