Longer loans make sense for the long-term.
I am often asked about what options we as a company offer to the real estate investor. What methods do I use to aid in the rapid success of the real estate investor? I encourage people to set aside previous thoughts associated with acquisition of real estate from the consumer perspective and explore the same process from a different angle.
Inevitably a question arises about how much better rate one could get by doing a 15-year loan. Surely the rate is better, so it must be a better savings for would-be real estate investors, right? The rate as it sits today is not a significant difference, but even if it were, I will review the benefit of the vanilla 30-year-fixed over the 15.
First, a 30-year will always give greater flexibility. The CEO of the real estate investment business must have the capability to be nimble with their business. They must have the ability to choose options. With a 15-year amortization, the cashflow capability is limited if not nullified completely. The entire rent amount is typically needed to satisfy the increased payment for the shorter amortized term. A 30-year loan, however, provides greater cashflow opportunity and can be paid like a 15-year loan should that be the course of action. If an investor owned 10 homes all with 15-year notes, it would require every cent of rental income to maintain. How would he/ she go about managing their properties should two go unrented?
They would be forced to go to their pockets to keep the business operating. If it were a 30-year, the cashflows of the other tenanted properties could be redirected to cover unrented properties until they are leased. That is making a real estate business maintain itself, not the investor maintaining the business. Many clients don’t realize they can pay the 30-year in less than 30 years. The concept opened their eyes to greater possibility with their investment portfolio. They have flexibility to redirect cashflow or snowball the cashflow for payoffs that outperform 15 years and have the peace of mind that the business will not require their personal funds to keep it operational.
Personally, I maintain the thought of taking the full 30 years to repay. Focusing back to December, the case for inflation nullifying compound interest…Check back in April to see how that principle has one paying less in inflation adjusted dollars. Each scenario has the same loan payoff of $83,960.00. The 30-year example with $73,711.04 of actual interest charged calculates to be less than the 15-year with a dollar amount of $33,529.18 being charged.
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