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I am in the initial stages of purchasing a SFR for the sole purpose of renting it out. I have been doing some reading on investment rental properties and have found that most all "gurus" talk about the importance of "leverage" and how making sure that your rental provides a positive cash flow.
This does make sense, but I feel that I am at somewhere of a paradox. My two options are the following, I could:
A) Get a 30 year fixed mortgage at about 4.125% and after collecting rent and paying the mortgage I would have a positive cash flow.
Or
B) Get a 15 year fixed mortgage at about 3.375%, and every month pay the mortgage AND an additional $1,000 out of my own pocket. In this option I would have a negative cashflow but I would be able to have the property paid off completely in about 7-8 years.
So which do you think would be the wiser option? My plan is to buy and hold and acquire another property once this one is paid off. I had thought that option B would be much better as I would pay much less interest over the course of the loan, but I am now having second thoughts after I hear to many gurus only talk about option A.
So what do you think would be the better choice and why?
I am in the initial stages of purchasing a SFR for the sole purpose of renting it out. I have been doing some reading on investment rental properties and have found that most all "gurus" talk about the importance of "leverage" and how making sure that your rental provides a positive cash flow.
This does make sense, but I feel that I am at somewhere of a paradox. My two options are the following, I could:
A) Get a 30 year fixed mortgage at about 4.125% and after collecting rent and paying the mortgage I would have a positive cash flow.
Or
B) Get a 15 year fixed mortgage at about 3.375%, and every month pay the mortgage AND an additional $1,000 out of my own pocket. In this option I would have a negative cashflow but I would be able to have the property paid off completely in about 7-8 years.
So which do you think would be the wiser option? My plan is to buy and hold and acquire another property once this one is paid off. I had thought that option B would be much better as I would pay much less interest over the course of the loan, but I am now having second thoughts after I hear to many gurus only talk about option A.
So what do you think would be the better choice and why?
This is your first one, so err on the side of safety. You never know when you're going to have to buy an A/C system out of the blue, or clean up after bad renters disappear on you. Go with the 30-fixed.
The 30-fixed will, most importantly, also leave room in your debt to income ratio to purchase more down the line. You can do the 30-fixed and pay it off in 15 years or less if you just send extra $$ with your payments.
What advantage do you see in paying off the mortgage?
And I mean to EVER pay off the mortgage?
Some people just 'feel better' with a paid off mortgage, on their residence or on their investment properties. When I initially retired, I felt this way, and we had available cash and paid off the mortgage.
But now, with interest rates so low, I totally agree with your sentiment. Hence, when we bought our current home, we took a 30 year mortgage and left all that lovely money making more lovely money in our 401k.
What advantage do you see in paying off the mortgage?
And I mean to EVER pay off the mortgage?
Well, I don't plan on buying and flipping, I plan on buying and holding and slowly amassing more properties. My thought is that once the mortgage is paid off, the rent paid to me will be pure income. But idk, if I'm wrong then tell me why, I'm asking for advice.
Edit: And if I'm planning on keeping the property 30+ years then it will eventually be paid off, but going the slow pay route will end up costing me $200k+ more in interest in the long run, right?
Idk, tell me where I'm wrong.
Last edited by WSPHXPELON; 01-27-2017 at 11:50 AM..
I plan on buying and holding and slowly amassing more properties.
Idk, tell me where I'm wrong.
Think equity. NOT cash.
The real lesson though is to choose the buy VERY carefully.
What money you make will happen THEN... or likely never.
eg: buy a fixer that you can put into service and with a few improvements (some capitalized and some expensed)
and about a year of good income documentation will appraise much closer to market than what you bought it for.
This is a lot easier to do if you start with enough cash to buy the fixer (or have it from some other low cost source)
than to start with a mortgage in order to buy something that a lender will require higher appraisal conditions to approve a loan on.
Quote:
Originally Posted by Jkgourmet
Some people just 'feel better' with a paid off mortgage, on their residence or on their investment properties.
When I initially retired, I felt this way, and we had available cash and paid off the mortgage.
What we do for our OWN homes
and what we might do at the end (facing retirement etc) are a very different set of concerns.
Then you have the liability issues advantage of being so leveraged.
I purchased my first rental in 2006, and worked the downpayment / amortization term numbers to where a 25 year fixed mortgage kept me cash flow positive. But....I also put any bonus money I got at work or extra left over at the end of the month towards extra principal payments. I paid it off two years ago, and it is a great feeling. All the rent money coming off that place now is essentially profit, and I'm stashing it away it to make a downpayment on my next place. I'm close to doing that. I was just running the numbers on buying another place today.
I have no vision of being a real estate mogul. My plan is to get enough paid off real estate to live off the income. Leverage is a tool, but I have no interest in remaining leveraged up and watching my rental income go straight to the bank.
I get the counterarguments. They typically boil down to (1) interest is tax deductible, so it really doesn't cost that much. and (2) not tying your money up in an asset when the stock market is without a doubt going to outperform it. I've got a MBA in Finance, I've done all the discounted cash flow models that support both lines of reasoning. So I understand the numbers behind them and get the concept.
But I'm debt adverse, and believe that paid off real estate is a powerful thing. I would personally never feel comfortable going into retirement with a mortgage on a house. But many people are. It's hard to lose paid for real estate. It's very easy to lose mortgaged real estate if you lose your job, have health issues, the stock market drops and your investments dissolve, etc. Hello 2009.
In the end it all boils down to what lets you sleep at night. Don't go with something because of what the gurus say.
Please do some research on your property rental deductions (Schedule E) regarding mortgage interest, and upon "recapture of depreciation deduction." Then spreadsheet your long term ROI. Also research capital gains taxes.
My advice would be you should learn to do the math and come to a more informed decision. Will you likely get a better return on your investment from option A or B?
This is your first one, so err on the side of safety. You never know when you're going to have to buy an A/C system out of the blue, or clean up after bad renters disappear on you. Go with the 30-fixed.
The 30-fixed will, most importantly, also leave room in your debt to income ratio to purchase more down the line. You can do the 30-fixed and pay it off in 15 years or less if you just send extra $$ with your payments.
Good Advise from Pfhtex..
Do the 30yr keeping your expense low, if you send one extra payment a year can reduce term to approx 23yrs, two extra a year reduce term to 18 years. Plus you get reported as being more responsible, your credit score shoot's up!!!
Good Luck..
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