Advice on Home/Rental Property

[FJSD]

Howdy all,

Been thinking about this issue for a while and find myself torn - could use some advice.

I'm looking at staying at my current job for at least 2 years and up to 5 or more (sky's the limit). As such we are looking into buying a house for around $350,000. Renting a similar home costs $2000/month.

Currently it looks like buying is a reasonable option. However, I'm torn between a 15 year fixed (about 3.25%) or 30 year fixed mortgage (about 4%). Down the line if and/or when we leave this job I foresee us keeping the house as a rental (great location, access to docs rotating through the area in 2 year cycles and good investment diversification). So, would it be better to go with a 30 year mortgage ($1,300/month payment) or a 15 year mortgage ($2,000/month payment)? A 30 year would ensure a positive cash flow as a rental, whereas a 15 year would be cheaper in the long run but result in a negative cash flow as a rental.

I realize that a lot hinges on how long I'll stay at my current job, but the answer right now is that I'm not quite sure.

I appreciate any input - thanks in advance.

[jfoxcpacfp]

I think 3/4 of a point is worth going with the 15-year. You can always double up payments, sure, but you'll be charge 4% on your mortgage. Negative cash flow as a rental is fine for awhile if you're able to get FMV. Your depreciation should net you a nice tax deduction which will help offset the neg flow. I'm giving very generic information, lots of other factors could affect my advice.

Since you're not planning on selling, does saving for a downpayment on your next home figure into your plans?

[StarTrekDoc]

depends on your priorities and thinking behind rentals/leverage and cash flow implications.  There's no single right answer.

I run against the FIRE mentality here where RE investing doesn't really fit the FIRE mold because of debt loads that RE tends to have if you're fully utilizing its benefits.

That said, 30 yr (or interest only) would the ideal use of the property if you're going for max leverage, cash flow and future RE investing.  Take the depreciation credit write down.  All depends on your debt load and risk too.

As we moved flushed out our portfolio with the planned properties, we've started paying off those properties to move them into cash/income flow properties (faster than we anticipated, but we've gone more conservative now that we're close to FI but 15-20 years for RE).

 

[FJSD]

Hi all,

Thanks for the input, seems like I was torn for a reason as both approaches sound equally viable.

Jfox - any future down payment would likely come from a taxable savings account rather than dedicated 1%/year high yield online savings account where the current payment sits. Logic would be that future down payment savings would be less structured than currently and have potential upsides of market returns (also potential downsides).

Star Trek - agreed that 30 year helps max leverage, does your opinion change if I'd really only look to keep this one house as a rental rather than continuing to leverage further rentals? The positive cash flow would likely go into index funds in a taxable account.

Thanks again for everyone's insight.

[StarTrekDoc]

No change.  If you're in the growth phase, and looking at 100% growth stocks, I would be the same in the RE investing side of things---growth via max leverage.  That means if you can get a 5% down interest only 30yr doc's loan (with no PMI)....I'd do it and plow any positive flow into stock market -- all in.

As you build portfolio and start moving to a conservative income driven model (or bonds mixture for same reason for stability and income protection), so do you build equity in RE investments to protect cash flows and investment as the property ages.  locking in 4% is a steal long term.

 

[jfoxcpacfp]

FJSD wrote:

Jfox – any future down payment would likely come from a taxable savings account rather than dedicated 1%/year high yield online savings account where the current payment sits. Logic would be that future down payment savings would be less structured than currently and have potential upsides of market returns (also potential downsides).

Click to expand...

That's fine if you can be flexible on purchase date and can wait out a bear market for a year or 2. Otherwise, move to cash for the downpayment 5 years before purchasing.