Are 15 Year Mortgages Better For New Investors

There are several reasons why real estate investors (both new and intermediate) could stand a better chance to obtain shorter amortization loans. As a matter of priority, investors need to work with smaller, local banks to establish lasting relationships and get rewarded in the long run. Typically, these financial institutions are known to offer:

• Local money-management services
• Cross pledging options
• A viable network of real-estate professionals, such as insurance agents, contractors, and even local attorneys
• Good understanding of local markets, etc.

While it’s generally not a bad idea to consider private money and hard money, the main question is how reliable can they be? A brokered loan is all that matters at this point. Previous experiences have revealed how challenging obtaining these loans can be for investors. Aside from the rigid processes entailed, other challenges could include:

• The requirement for extensive documentation
• Presentation of exceptionally outstanding financial records
• No option for cross pledging
• High broker fees
• Non-flexible processes
• Slow turnaround

Here are some helpful reasons why working with smaller, local banks could be more on the advantageous side for most real estate investors.

Lesser issues to contend with

When it comes to obtaining shorter amortization loans, most small banks are known to offer a better competitive advantage compared to other loans. One of the most striking advantages is the quick turnarounds they offer on these loans. Let’s imperatively state at this point that it is invaluable to have an experienced loan officer who understands the ins and outs of the entire process, as this can go a long way to not only simplify things but also expedite processes.

Related: Stop Paying Too Much For Your Multifamily Investment

No doubt, there are drawbacks with other loans like the private money. Most times, closing the deal on such loans could be exhausting due to the arduous processes entailed. New or intermediate investors are good to go with local banks as processes are not overweighed with laborious burdens like having a third specialist conduct lease reviews, getting an appraiser to examine the property over and over again, and so on.

Lack of reinvestment profit

It is common to have a 15 or 20-year loan get rejected due to the lack of reinvestment profit. To this end, any rational investor can decide to opt for a 30-year loan with about 10-15 percent returns on real estate spread across the alternative 8 percent stock market gains or 5 percent mortgage interest savings. While it may seem as if there is relatively no cash flow for reinvestment on the deal, it is actually not a true reflection of the underlying situation.

Actually, there are several other ways investors can make good returns on investment. They can purchase yet another property with the equity they’ve got from the previous property. This form of reinvestment is technically referred to as cross-collateralization which is likely the most appreciated benefit of working with a small, local bank.

Related: How To Raise The Rent Without Losing Tenants

There are two things investors stand to gain when the cross-collateralization method is applied. They include:

– More opportunities to purchase new properties since reinvestments on both appreciation and loan principal reductions can be effectively achieved within the shortest possible time.

– Typically, it takes about 75 to 80 percent to meet the loan-to-value requirements of the bank. With these, investors can reasonably handle more investments without even having to provide any additional money.

More additional benefits

It is quite interesting to see that investors can enjoy more additional benefits with shorter amortizations. As an automatic savings plan, there is absolutely something to hold on to when retirement sets in. Simply put, investors can use this to organize the cash flow that they will need to offset payments when they finally retire.

In the event of an economic downturn, this equity-build method of financing can efficiently serve as a recovery plan. Basically, investors can effectively lower their monthly payments by refinancing their properties to longer amortizations should the local economy plunge.

Related: How to calculate a mortgage payment (excel template)

Finally, shorter amortization loans are better off due to their ability to impose financial discipline on investors.

Worthy of note

It is well-recommended that investors use agency money (VA, FHA, and so on) to make their first purchase within the 30-year amortization as this will help to yield low down payment.

In conclusion, it is important to understand that while shorter amortizations may not be recommended for all real-estate investment purposes, they are actually the right choice for most situations. Just so you know, there is no better way to reap the long-term rewards of these loans than building relationships with smaller, local banks.