Is it Better to finance rentals over long periods?? - Posted by Brenda K

Posted by ROBERT on June 13, 2000 at 19:06:04:


Is it Better to finance rentals over long periods?? - Posted by Brenda K

Posted by Brenda K on June 13, 2000 at 14:15:50:

When buying a rental property is it better to get a mortage over a long period of time (say 25 years as apposed to 10 or 15)?? This way you would have a larger positive cashflow right from the beginning but it would take much longer until the whole amount the tennant was paying would be positive cashflow. Just wondering what your thoughts on this were. :slight_smile:

It depends - Posted by Laure

Posted by Laure on June 14, 2000 at 06:34:23:

I have done both, but prefer a 15 year amortization. If I were to advise a new investor, I would suggest taking a 30 year amortization, and PAYING the 15 year payment. Reduces risk that way.

I have enjoyed the large checks at closing when selling properties I paid in 15 years. It’s been a tough road to tow with the higher payments, but darn, the size of those checks ! I think I would have just blew through the few extra bucks on a monthly basis, and increased my standard of living.

I sold a house last spring. Purchased in 1998. Paid 21k. Sold for 73k. I had it paid off, no bank to pay at closing at all. NICE CHECK ! If I had made 30 year payments, I would have cut a check to the bank for 19k out of my sale.

Taxes? I did a 1031 exchange and took 10k in boot.

I could go on and on with examples of rentals I’ve recently sold. Bottom line is, I have done better with the cash NOW than I would have with the monthly pittance I would have saved with lower payments. But that’s me.

Laure :slight_smile:

Re: Is it Better to finance rentals over long periods?? - Posted by Mark

Posted by Mark on June 14, 2000 at 24:29:37:

It depends on your goals. If you are looking to do more deals and purchase more real estate, go with the longer time period. This gives you more cash flow to save and to buy more properties. On the other hand, if you aren’t looking to buy any more properties, pay it off as soon as posiible. Once your mortgage is paid, you’ll have a strong income producing asset.
If you are unsure, I’d go with the longer term. Most loans alllow you to pay off early, so you can always make larger payments and pay off the note early if you have extra cash flow.

Re: Is it Better to finance rentals over long periods?? - Posted by JoeKaiser

Posted by JoeKaiser on June 13, 2000 at 23:51:36:

Paydown on a mortgage is the LAST thing you need to be concerned with. SURVIVING in the earlier years is the tough part, and it’s CASHFLOW that will make that possible.

Forget about getting the things paid off. With any luck at all, appreciation will someday kick in and get you the equity position you’re hoping for. Appreciation is free. Paydown on a mortgage isn’t . . . and taking real dollars and turning them into equal amounts of equity isn’t such a hot idea.

Longer is better. In the meantime, you’ve got the cashflow that will make it possible.


Re: Is it Better to finance rentals over long periods?? - Posted by Bill Gatten

Posted by Bill Gatten on June 13, 2000 at 22:34:09:

The best way to approach your conundrum (as it were) might be to set yourself up a “T” Chart based on the two options. Big cash flow now with smaller payments on one side, with no cash now, but a shorter loan term and really big cash flow some day on the other side. Give you self, say, a 25 year run time, then add up the total amount earned in each side, and see what you end up with (presume a reinvestment rate on early cash flow of, say, 10% or so…you shouldn’t have any trouble getting that in our business).

Even before you start the exercise though, I can tell you that if you reinvest your cash-flow income as it’s received (wisely, as they say), you’ll be far better off to go for the long term note and earlier cash-flow (called “leverage”). But if earlier security is your wont, rather than maximum income, then take the advice of the person who suggested depriving yourself of sweets in the early years, for a bigger bunch?a cookie in the latter ones.

Bill Gatten

Re: Is it Better to finance rentals over long periods?? - Posted by t jent

Posted by t jent on June 13, 2000 at 22:24:50:

In my opinion, better to amortize over a longer period, like thirty years. And put as little down as possible as long as you have positive cash-flow. The idea is not to acquire equity or pay off the property, it’s getting the best yield. As soon as you reach a certain level of equity you should refi or trade up anyway so to always maximize your yield. Sitting on equity is bad. Leverage is good.

Re: - Posted by Rich

Posted by Rich on June 13, 2000 at 19:12:05:…

Re: Is it Better to finance rentals over long periods?? - Posted by tarheel T

Posted by tarheel T on June 13, 2000 at 18:28:52:

excellent question… I have only done flips and am now looking at one to keep and am having a the same question.

Rich, when are you gonna break down and buy a new keyboard?? You have been without a spacebar for months. (DNO) - Posted by Bill Gates

Posted by Bill Gates on June 13, 2000 at 23:56:10: