So you’ve decided to finance a property that you are planning to rent, but you can’t decide on whether to take out a long-term loan at a decent rate, or a shorter-term loan with much higher payments, but a much better interest rate. As an investor, you’ll run into this question time and time again. You really need to sit down and put pencil to paper to determine which way is right for you.
You might have heard the saying “cash is king,” but with investing in rental units, you might say “cash flow is king.” It’s certainly enticing to take that lower rate to build equity quickly, but what happens if you are without a tenant for a while, or, worse yet, you have a tenant that isn’t paying you? Regardless of what you are receiving in rental payments, the bank is going to want to get paid. Having a positive cash flow on an on-going basis is usually much more important than paying off the property faster.
A little-known fact that many investors don’t think about is that there is usually nothing in the loan documents that stops you from making additional payments if you desire to pay it off more quickly. Sure, you can make extra payments, but it might be worth your while to build up a cash reserve in the event that the unexpected happens. When the reserve builds to a large enough point, you can pull out some of it to buy another property…and then the snowball starts to roll.
When presented with financing options, most investors fail to realize that unexpected events happen. Most only think of the possibilities and they fail to plan for rainy days. In most cases, taking the lower payment to improve cash flow is the best option.