At first glance, shorter-term rental loans might seem like the more cost-effective approach when compared to 30-year loans as they typically have a lower interest rate. When you break down all the factors, however, the inherent flexibility afforded by a 30-year loan offers some distinct advantages for real estate investors. Acquiring rental assets is a fantastic investment, particularly when you have the ability to leverage your finances to purchase multiple properties and optimize your cash flow streams. While there are plenty of investors out there that pursue short-term mortgages because their interest rates are lower and they believe they can pay off their debt faster, the more logical approach is to maximize revenue by acquiring several properties via a 30-year rental loan.
Crunching the Numbers
Say you get a 15-year, $200,000 loan for a rental unit at a 4% interest rate. That means the payments will be $1,480 a month. Over the entire lifespan of that loan, you will pay a total of $66,286 in interest. With a 30-year loan at 4.5% interest, the total interest you would pay over the life of the loan would be $164,812.
Now you may see those numbers and the first thing that jumps out is that you are saving $98,526 by opting for the shorter-term loan. The catch, however, is that you are paying interest over an extended timeframe with the 30-year option as opposed to the 15-year loan. The monthly payment on the 30-year loan is a mere $1,014, whereas in a 15-year loan setup you would be paying $1,480 a month.
Assume you reinvested that extra $466 dollars a month you would have if you went with a 30-year loan back into the principal payments of the loan balance, which means you would only wind up paying $79,508 in interest and be paid off in under 17 years. It certainly costs a nominal amount more to carry a higher interest rate, but over the course of 15-years that is only $1,100 additionally per annum—which is even less substantial given the fact that money is worth less over time thanks to the effect of inflation.
Sure, you will end up paying marginally less in interest with a 15-year loan as opposed to a 30-year loan. If you total the payment savings with the 30-year option, you save $5,592 per year and $83,880 over 15 years by going with the longer-term loan.
That extra capital can be utilized for several different purposes that will ultimately produce significantly more value than the $12,000 in interest you would save with the interest you would receive by choosing a shorter-term loan. You can use the cash to solidify an emergency fund. Alternatively, you could pay extra into the mortgage for the time being, and if a situation arises unexpectedly that required you to increase your expenses, you could simply halt the extra mortgage payments for as long as necessary.
From an investor’s perspective, a 30-year loan also enables you to acquire more rentals simultaneously—which allows you to significantly maximize your passive income. For example, assume you buy 119 properties over 30 years with 30-year loans compared to 32 houses with 15-year loans. The first approach would net you $53,000 monthly, whereas you would only realize an $11,000 profit with the 15-year loan option.
Our hard money loans give you the cash you need to submit a competitive offer on your next investment goal without having to wait weeks or months to receive your funds. The experts atCoastal Capital Funding understand the unique challenges and dynamic nature associated with real estate investing and pride themselves in crafting creative and effective financial solutions that are individually tailored to fit your specific needs and objectives. Contact us today to learn more about how we can help you get started on building your investment property portfolio.