I’m Asking You: 15 Years or 30 Years Amortization?

Okay Kansas City real estate investors, I’d love to hear your opinions.  Then I’ll do some math. 

In today’s current economic times and interest rates at record lows for everyone, including real estate investors, do you still go max leverage and amortize the loan over 30 years or do you take a 15 year amortization and smack that principal down as quickly as possible? 

You can email me or post a comment here.  But in any case, I’d love to hear the prevaililng line of thought out there.  Bawldguy, I’m talking to you.  AI – I’m sure you’ll have an opinion.  Let’s get this conversation started.


Filed under Financing Options

18 responses to “I’m Asking You: 15 Years or 30 Years Amortization?

  1. Pat

    I would go 30 years and wait and see what will happen with inflation.

    If inflation heats up, I will pay over 30 years with cheaper dollars.

    If inflation does not come and I am getting a lower rate of return on my money, I will make extra payments to shorten the term.

    Also buy FHA or VA with as large a balance possible. They can be assumed by other buyers. Anyone thinking there will 1970s creative deals in our future. My mother was an agent in the 1970s and had to put together all sorts of creative deals.

    Do you save a half point now and go 15 years?

    Do you wait and maybe pay with dollars that are worth 5% less or more each year for the next 20 or 30 years?

  2. Chris

    I’m with Pat on this one.

    Current rates are incredibly low. Paying a small premium for 30 years of a low fixed rate seems like a good deal in all situations except a deflationary environment.

    For those that are a little more recent in history, care to give a refresher for the `70’s creative deals?

  3. Thanks Pat & Chris,

    I’m not yet gonna weigh in. Hoping to draw out a few more comments.

    But Chris, old timers have great great stories. One benefit of all the FHA financing going on right now that many/most don’t realize is that these loans are/will be assumable. It used to be they were many times no-qualify assumable but now days they are 99.9% qualify assumable.

    In the old days, at least from what I remember, you’d get mixtures of owner financing, assumable loans and cash down payments.

    Bawldguy is so old he used to put deals together in 16% interest rate days and so I’m sure he can enlighten us further on that aspect.

  4. Another Investor

    Bawld Guy’s buddy, Brian Brady, wrote a great post for Bloodhound Blog on the return of seller financing. Unfortunately, he may be right about a mortgage freeze in the near future.

    I remember the early 80’s where sellers wrapped their assumable lower interest rate loans or carried seconds on new firsts to get the effective interest rate down to something in the low double digits. You did that, or you didn’t sell. I bought my first house in the spring of 1984 and the builder bought the rate down to 11 3/4 from 13 3/4. I was thrilled just to get into a house.

    I have been griping for over a year about the lack of financing for investors with multiple properties. Now I’m beginning to think I might have been lucky not to overleverage myself in a weak economy and a declining real estate market. With the likelihood of a double dip in home prices and all the folks out there with short sales and foreclosures who want to own again, I’m beginning to think I should be a seller of a couple of my mistakes (i.e. houses with pools) and offer seller financing. If I could get a 10 percent premium over current market value, I might just do that.

  5. Another Investor

    Oh, yeah. Go with the 30 year loan and prepay it if you decide to get out from underneath the mortgage. The pricing difference is not sufficient to give up the flexibility. Keep your capital for the next investment opportunity. There will be several in any 30 year period.

  6. First of all, bite me. 🙂

    I’m too tired to go into some of the circus acts we pulled off in the late 70’s, early 80’s. But you’re right, we had some fun — which is code for, we survived.

    The question about the 15 vs 30 year loan strikes at the crux of the adjustment real estate investors must be making now, not later. Since the foundation of this adjustment has everything to do with radically altering assumptions and big-picture strategy, it’s somewhat of a paradox that the end game remains unchanged — retirement income.

    Your question, Chris, is a cleverly veiled trick, or trap. 🙂

    Given the end game being retirement cash flow, the strategy’s chronology is critical. Equally pivotal is the beginning amount of capital available to the investor, along with what they may/may not be able to add periodically.

    1. How long does the investor have to create the plan’s goal for retirement income?

    2. How much money do they have to make it happen?

    3. How much money, if any, can the investor add to the mix on a monthly basis?

    The answers to those three questions dictate how much of a down payment I will ultimately recommend. For example — here’s an ongoing case study in the first inning.

    Clients own San Diego units with net equity of about $300,000 or so. They’ll be doing a 1031. Before they execute that move, (or during) they’ll acquire a couple duplexes in another state. This will be done with roughly $120,000 — maybe a tad more. (Current cash on hand.) We’ll use maximum available leverage for these two purchases — 20% for one, both if possible. They’ll cash flow about $700-1,000 monthly.

    With funds from the exchange they’ll acquire three more duplexes using 30% down, but only because of Fannie Mae underwriting rules for more than four loans. (Dang it!) Otherwise they’d be ending up with six properties, not five.

    Won’t bore ya with all the math here, but in roughly 13-15 years or so, all five duplexes will have been made free and clear via the application of the aggregate cash flow to the loans. The clients will also be adding $500 monthly towards this end.

    The bottom line is that before the husband turns 60, (43 now) he’ll have created about $95,000 a year in retirement cash flow annually — much of it tax sheltered. If he waits 30 additional months, he can also finish off the loan on his primary residence.

    By beginning with higher leverage than some might prefer, they are able to acquire 1-2 extra duplexes which will make a huge difference at retirement. By purchasing five properties instead of just three, they’re able to generate more initial income which speeds their ability to begin whacking down the loans.

    This is the short version, not the war ‘n peace version you’re used to. 🙂

    The key to deciding what’s best for each client, are the three factors of time, initial capital available, and the ability to add consistent periodic cash for the duration.

    Make sense? I’d love to talk with you about this.

  7. AI – Seller financing? I need to read what Brian wrote. Avis Wukasch of KW maintains that the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E.) says that anyone who takes a residential mortgage loan application and offers or negotiates terms of a residential mortgage for compensation or gain is subject to the act.

    Now, I’ve been ignoring this because I think it’s largely unenforceable on owner-sellers and their agents. However, the law reads that it is enforceable. And there is a movement in many states to get this exception (for owner-sellers and their agents) made. Largely because Habitat for Humanity and others like them are being bound by this law.

    But we can do a whole other series on that later.

    Bawldguy – Are you sure you are not my biological daddy? 🙂

    I’ll wait a while longer and see what anyone else may have to say. But this question was born out of options I was penciling with a client two days ago.

  8. I’m gonna take the 5th. 🙂

  9. Another Investor

    You are not THAT young, Chris. Older brother, maybe!

    Bawld Guy describes a solid, conservative, “purposeful” plan for someone investing for retirement income. I still would go the 30 year route on the mortgages, because somewhere in the 15 years, something is going to change. It could be positive, such as a window for investment, or negative, such as a job loss or prolonged downturn in the rental market where the units are located. I want the option of paying down the loans, not the requirement.

  10. Chris — AI listed some solid reasons why 15 year mortgages may not be for many investors.

    I have one simple reason I don’t use ’em: Even with no future problems, 15 year ammos don’t generate the cash flow. Sure, in 15 years you’ll be debt free, but in a large minority of my cases it can happen much sooner than that. In one case the Plan will indeed find them free ‘n clear in less than nine years.

    That’s not to say there aren’t some wicked cool exceptions, cuz there are, and when they arise I have them pounce on 15 vs 30. Rare though, very rare.

    Make sense?

  11. Let me just jump in here, if I may. I bring this up because it’s been on my mind lately. Two days ago I had a buyer who is in his twenties buying another property he intends to live in for a while and then rent later on down the road. It’s been a successful model for him before.

    Anyhow, I brought up “what if?” Then I got my pencil out and started plugging in the numbers. Eh. Not that much advantage to “locking” yourself down on the 15 year note. You could always just Am at 30 and pay down at 15.

    But where the entire scenario really went south was when I brought in the “intangibles.”

    Upper twenties. Solid income that’s only going to get better. Cash liquidity of about $48,000. Wants to own about 5 more properties in the next 5 years…though not all will be the scenario where he buys FHA, lives in two or more years and buys another.

    Cash flow is not currently important. It’s necessary to cover all the PITI, expenses and unknowns. But he’s not going to be living off of it.

    Leverage is what is important. The acquisition to the 9 property goal and then the pay-down plan from there is the direction he is going in.

    Knowing full well that things change. Maybe for the better. Maybe for the worse. In 5-6 years we’ll examine the situation (an ongoing endeavor) and maybe we’ll do a 1031. Or maybe we’ll accelerate the principal reduction. The point is we’ll see.

    But currently, future loan qualifications and leverage structures are the primary focuses. Make sense?

    Now, if the dude was 49 years old, earnings starting to decrease we may come up with a different set up priorities.

    Everybody has a different set of priorities and “make-up” in the scenario. There is no one-size-fits-all real estate investor scenario that I am aware of. Despite what Robert Allen might tell you. 🙂

  12. Thanks for all the input. Any rebuttals are more than welcome.

  13. Robert Allen? Thought this was a PG site.

  14. Another Investor

    Just think, if all those folks that bought “Nothing Down for the 2000’s” and made it the 35th most purchased book in Amazon’s real estate investing section had called one of you guys instead……

  15. Without going “Guru” I honestly think we could make some money and keep a lot of folks from doing stupid things if Jeff and I held an Investor’s Boot Camp at some point.

    Or I could just sell out and start selling all these Californians all this ghetto garbage they are always calling me about thinking they are getting a great house for $22,000.

    Uh, yeah. If you ever rent it and if you can ever collect rent and if you can find a property manager that will actually manage the property.

    But hey, in the mean time I’d have my $1,000 and be on down the road.

  16. Just tell me the when and the where. 🙂

  17. Pat

    I have three 15 year mortages with 5, 7, and 9 years left. The APR is about 5.875%. The three properties are worth 300k + (in this down market) total with a loan balance of about 90k.

    I have thought about rolling the loan on one property but will not. I see four reasons not to.

    1. Could lower my credit score and hurt my ability to purchase another property or get a good interest rate.

    2. The costs of getting new loan does not have a strong enough pay back rate.

    3. I am paying more principle than interest.

    4. My mortages are about 50% paid off. A new loan will bring my mortage debt to credit ratio back to 100%. Will that bring my credit score down?

    I would love to jump back into the KC market right now. I have three homes in Volker and one in Waldo. I am in the military and will retire in two or three years. I took advantage of the mortage melt down and bought a home in Volker with cash in January 2009 when I came back to Fort Leavenworth for one year.

    My plan is to come back to KC and exchange for other properties after I retire. Or maybe sell and pay taxes and start a new basis. Time will tell of our tax future. I move to Fort Bragg NC next year and could end up selling my KC properties if I decide to stay in NC and take advantage of a military population to rent to.

    There is no one way to buy. It depends on the “NOW” and your ability to respond. Good deals are for those who can act. Bad deals happen when others push you to act.

  18. Pat – There are still unknown variables in your story before I can ever comment. If you ever want to take the conversation offline just email me or give me a call at 913.568.1579.

    North Carolina is beautiful. It seduced Roy back home. My dad lives down in Charlotte and won’t leave at this point. Who knows? You could be the next permanent resident. But never forget KC or “real” bbq. 🙂

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