Most Small American Landlords cannot afford to purchase rental properties outright with cash. For this reason, it’s logical to leverage a 30-year fixed loan from a mortgage company. Opting for a 30-year fixed loan over a 15-year fixed loan on a rental property has a few advantages, including:
- Lowers your monthly principal payment – helping you hedge against vacancy risk. Your mortgage payments on the rental property will be lower in the event the building goes a few months without a tenant.
- Maximizes your profit margin – if your mortgage (principal, taxes, interest) is only $700.00 per month on a 30-year fixed as opposed to $1,000.00 per month on a 15-year fixed, naturally your monthly profit margins on rent collected are maximized. You can use this additional profit to save for a down payment on another rental property.
Of course, there is a different school of thought with other small landlords about paying off the rental property as quickly as possible. Both approaches have their pros and cons.
Most banks give you a 15 day grace period to make the mortgage payment. If you’re using Bank of America as your mortgage provider as an example, you can enroll in their PayPlan/12 auto ACH withdrawal program. They will not advertise that you can setup the ACH withdrawal to occur on the 9th of every month. You must call and explicitly tell them to set it up this way. Here are the advantages:
- Most small landlords carry a mortgage on their rental properties, especially in the earlier years. If a tenant is late in paying the rent, you have a window of opportunity to first collect the rent funds before your mortgage payment is made. Of course, we recommend keeping a safety stock of cash available in your operating account to cover unexpected events like late rent payment – but you should push the date on the mortgage ACH withdrawal as far to the right as possible.
- You continue to earn interest on the rent collected in your operating account for those 9 days at the beginning of each month. Say you own 25 properties and collect $25,000 each month. If you add up the interest collected over the course of time, you would be pleasantly surprised at how much you’re actually making.
Bottom line is this – call your bank today and ask for the ACH withdrawal of your mortgage payments to come out on the 9th of every month. Sign all your lease agreements for rent payment due on the 1st of the month with a 3 day grace period. If they are late, charge a late fee.