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30 vs 15 Year Mortgages for Rental Properties

The most common traditional financing options for 1-4 unit investment real estate properties are 30 and 15 year mortgages. While other financing options do exist such as seller financing, private financing like hard money lending, or simply cash, using a lender with a traditional mortgage will likely factor in to most of your investment properties.

I will note however that for commercial properties over 4 units, a 20 year mortgage is usually the most common loan option. But, for this post, we are discussing small multifamily properties.

Anyway, I’ve already covered the process of obtaining financing for investment real estate in detail here. But a common question then becomes, “What type of mortgage is best, 30 or 15 years mortgages?”

In reality, there is no wrong answer.

The important thing is just to find which fits your needs and goal best.

30 15 Year Mortgages

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Examining 30 vs 15 year mortgages

Let’s first cover what is the same with these mortgages. And the answer to that is: pretty much everything.

The only difference is usually the length of the mortgage, obviously.

Interest rates, fees, closing costs, and other terms are generally otherwise the same for both 30 and 15 year mortgages.

An important side note

I will make a note here that I would highly recommend that you obtain a loan with a fixed interest rate regardless of the length of the loan. Several lenders will offer adjustable rate mortgages. However, the risk of increased rates is too high to justify this risk. Stick with a fixed rate!

With this baseline established, let’s talk about the pros and cons of 30 and 15 year mortgages.

Advantages and disadvantages of a 30 year mortgage

The biggest advantage is that the mortgage is spread over more years. Thus the monthly mortgage principal and interest payment is lower. This therefore increases your immediate monthly cash flow!

The biggest disadvantage is that the mortgage is spread over more years. This means that in the long run, you pay more in interest. You also have a mortgage on the property for longer, delaying the time until you actually “own” the property and get a huge bump up in cash flow.

Advantages and disadvantages of a 15 year mortgage

The biggest advantage here is that the mortgage is for half the time period. Therefore, after just 15 years, you own the property outright and your cash flow skyrockets because you no longer are paying a mortgage principal with interest.

The downside? You guessed it! The mortgage is for a shower time period. Thus, your monthly payments are higher and your immediate cash flow is lower.

Let’s now look at a real life example!

Hopefully this will illustrate the upsides and downsides even better.

The example here is our 4th investment property. You can find a full deal analysis of that property here.

Let’s now look at a cash on cash analysis for the property with a 30 year mortgage:

property deal analysis

With a 30 year mortgage, our monthly principal and interest payments are roughly $883. This permits a monthly cash flow of $1259, good for 22% cash-on cash!

Now let’s look at the same property with a 15 year mortgage:

property deal analysis

With a 15 year mortgage, our monthly principal and interest payments are roughly $1,321. This permits a monthly cash flow of $822. This is still good for 14.4% cash-on-cash return but still less immediate cash flow than with the 30 year mortgage.

And what is the cash flow once the mortgage is paid off?

Once the mortgage is paid off completely, whether after 30 or 15 years, the cash flow is equal to the net operating cost in the above tables.

That means that this property cash flows $2,142 monthly without a mortgage!

So which is better? 30 or 15 year mortgages?

I told you from the beginning! Neither is right or wrong.

It really comes down to your priorities and goals with your properties. Namely, do you prioritize immediate cash flow or principal pay down?

So, why do we use 30 year mortgages on our investment properties?

Thus far, Selenid and I have used 30 year mortgages for all of our investment properties. Does this mean we always will? No, of course not.

But, at this point, we are prioritizing immediate cash flow. That is the reason that we invest in real estate to begin with. By creating passive leveraged income via cash flow from real estate, we increase our degree of financial freedom immediately.

We do recognize that this means paying more interest to the banks over the long run. However, we are not the ones paying that interest. Our tenants are. In that sense, we do not mind as much.

Again, I do not think this is the definitive right way to do it. But this aligns with our current financial goals.

We also like that we still have the ability to pay off the mortgages quicker than 30 years if we want. There is no pre-payment penalty on the loans. So, once we pay off student debt and our home mortgage – our main sources of bad debt – we can pay off our investment mortgages – a form of good debt.

As your progress on your real estate journey…

…Keep in mind this information in determining which loan product is best for you.

Like everything else in real estate investing, being informed and clear-headed about your goals and strategies will serve you well!

Looking for more information about real estate investing for physicians?!

What do you think? Do you use 30 or 15 year mortgages on your investment properties? Why? What are you real estate investing goals? Let me know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected]

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