You can talk to many borrowers who have taken 30-year fixed rate loans and after, say, 16 years, realized that although there are 14 years remaining to pay off the loan, the loan balance AND the payment seem very low relative to marketplace rents and prices. The remaining 14 years is almost meaningless, since in many cases (statistically and historically) the loan balance will be a small fraction of the home price and not very “meaningfu.” Just to get some perspective, most other countries on earth have loans that constantly adjust based on inflation. Both the payment and the balance track inflation all the time, usually with no yearly and lifetime caps as adjustable loans have in the U.S.
From a historical perspective, these are extremely low rates. Most experts think that in the future, mortgage rates will rise; from a historical perspective even 7% is considered a low rate. Thus, these days, you can “turbo boost” the great power of the never-changing-30-year fixed rate loan by also locking in these amazing rates which will never change. If in the following years interest rates indeed go up, you will feel quite good about having locked under-5% rates forever.
Some would say that the 15-year loan is also better since it has a better rate. True, the 15-year rate may be 0.25% or even 0.5% better than the 30-year rate. However, in my opinion this is not enough to justify the enormous loss in flexibility. In addition, having the loan for a longer time allows inflation to “erode” the loan even further. This last consideration greatly minimizes the argument some investors make that “…with a 30-year loan I pay hundreds of thousands of dollars more over the life of the loan.”
One factor missing here is that they neglect the TIME VALUE OF MONEY! These extra dollars paid in year 20, 22, 28 etc., are in fact extremely “cheap” dollars in the sense that their buying power is greatly lowered over time. If the value of these future dollars were to be calculated based on the PRESENT buying power of the dollar, some of the later payments may be worth mere pennies on the dollar.
In summary I recommend getting a 30-year loan and then choose how long to take to pay it (anywhere between zero and thirty years – you choose!).
Everyone mentioning this blog is invited to attend for free, with associates. Just email us at firstname.lastname@example.org to register, and in the subject line write, ‘Read your blog!’ Then give us your contact information. We will respond with a confirmation for your free entry. AND that is all. We hate spam as much as you do. See you there.
I maintain that the ideal property for real estate investment for the busy professional is the Single Family Home (SFH). SFHs are almost a perfect property for the individual investor who also has a regular job or business. SFHs are still the “American Dream” for most people. They are also a relatively attainable dream in many large metropolitan areas in the U.S. where prices are quite affordable, even in 2016.
Technically this loan is available on 1 to 4 residential units so duplexes, triplexes and four-plexes also qualify. However, SFHs are usually superior to the 2-4 unit properties. In good areas you will usually find only SFHs, while you may have to travel to another part of town to see the “plexes” and they will usually be surrounded by many other “plexes.” The “plexes” are more likely to present management challenges, have more short-term tenants (statistically) and to top it off, may not necessarily provide as good an appreciation over the long term.
One exception is new duplexes in white-collar areas, but overall the SFHs are superior. I have been buying homes for well over 30 years, and helped people buy nearly 10,000 homes in dozens of markets. During these decades, I have witnessed many “plexes” and their performance as well as many thousands of SFHs. My experience, and the experiences of thousands of investors, leads me to favor the SFHs over the “plexes.”
Buying larger residential properties – apartment complexes – can be a good investment, but there are areas where the investor needs to be an expert. The optimal apartment complex size, based on the experience of most apartment complex investors, is between 100 and 300 (many say 150-300) units, so economies of scale can be utilized to improve cash flow.