Posted by Dave T on August 11, 2007 at 11:57:00:
You may also want to reconsider your plan to use 15-20 year loan amortizations rather than 30 years. I know that the long term goal for many buy and hold investors is to own property free and clear. Shorter loan terms may get you there faster and may have slightly lower interest rates.
Shorter loan terms also carry higher monthly loan payments, which means lower cash flow or maybe even breakeven cash flow for marginal markets.
I suggest you consider that the most experienced buy and hold investors are not buying a property, but instead, they are buying the “cash flow”. This investor buys a property that produces a monthly income stream and a lump sum cash flow when the property is sold.
Buy and hold investors want to minimize the amount of cash out of pocket that they put into a property to produce an acceptable cash flow. They prefer to let their tenants buy the property for them. They still get to free and clear properties over time, just with their tenants’ money.
By minimizing the amount of out of pocket cash you invest in the property, by taking 30 year loan terms that have a smaller monthly payment, you will get a better return (yield) on your invested cash.
Nothing prevents you from using excess cash flow to pay down your mortgage loan faster. You can always pay off your 30 year mortgage in ten years by sending in a double payment every month. If you do so, then you are doing it with your tenants’ money. If you don’t have the cash flow to pay off the loan any faster than a 30 year amortization will, then you are not in the negative cash flow situation you would have with a 15 year loan.
Just more food for thought.