Posted by Rich Hyams on August 18, 2004 at 21:08:52:
Often times a negative ammortization loan is the right choice. If appreciation is wild and you expect it to continue, you are better off buying as much as possible and servicing debt as little as possible.
Gotta agree with Joe, but would even go a step further in a quickly appreciating market and get a 5/1 super low introductory rate.
I am considering a purchase of an investment property and was wondering what the pro’s and con’s are of a 15 vs 30 year fixed rate financing. Will the tax savings from higher interest payments offset some of the negative cash flow or is it something that varies on a case by case basis?
Posted by Wayne-NC on August 18, 2004 at 14:14:27:
The key here as stated above is if the existing and future cash flows can support the higher payment then yes, you are fine with a 15 year mortgage. However, should that senerio change at some point in time, it is harder to turn a 15 year mortgage into a 30 year than it is to turn a 30 mortgage into a 15.
Many investors in large multi-family communities will go for a 40yr amortization over a more traditional 30 yr, just for the added cash flow. These of course are institutional loans; (pension funds and ins companies).
When investing are in the rental business, it is all about c/f, not about equity. Equity cannot be eaten, as they say.
Re: 15 vs 30 year financing - Posted by Joe Kaiser
Posted by Joe Kaiser on August 18, 2004 at 19:15:45:
With a 15 year loan resulting in a payment nearly 30% higher, I cannot
support your “negligible” inference. That ain’t negligible.
And even if the cashflow did support that payment, it only makes sense
to go the 15 year route if you cannot otherwise invest at more than 6%.
Certainly, if you could take that extra payment amount and put it
somewhere at a higher rate of return, “better off” would be a
I’d do the 30 year deal 11 times out of 10, and it’s not a matter of
personal choice so much as it is a matter of making bank.
30 yr loans certainly help make the cash flow positive, and that’s what its all about. Forget negative cashflow. And when starting out 30 yr loans make the most sence.
However, I can also see situations where 15 yr make sence, including #1 it still is positive cashflow, #2 usally 15yr rates are slightly lower than 30 yr rates, #3 say you’re a buy and hold and on the downhill slope of your investment career and approaching retirement.
I even went crazy this year and did a 10 yr mortgage, the interest rate was lower and the payment was the same as last years 15 yr loan and its paid off over 4 years sooner. I love positive cashflow and expect it on all properties, but when that mortgage is finally paid off, well then the positive cashflow grows enormously.
I was talking to an investor today, who told me he never did a fixed mortgage and never had a mortgage 5 yrs, before either refi, selling, or paying off the loan. I guess I’m more conservative, I like the fixed rates, particularily today with the low rates. I’ve been through lots of different interest rates. In 1971 the interest rates were 7%, in 1981 they were 16%, today 5.75% fixed for 30 years. These low interst rates certainly help the posiitve cash flow, but you have to figure that there going to be higher in the future.