A real estate purchase, whatever it is, is not a trivial act: it is often associated with a credit, which commits you for a few years of your existence. It is sometimes the project of a lifetime, especially when it comes to his main residence. In the case of a rental investment, it’s a little different, but knowing how long to borrow remains one of the key factors for the success of your project.
Beyond people able to invest cash in real estate, the vast majority of individuals will have recourse to a loan taken out with a bank. The question of how long to borrow remains one of the cornerstones of your investment project. It directly conditions the amount of your monthly loan payment, and therefore the associated cash flow. Several schools exist on this subject, and of course, there is not only one truth: each case is unique, each context is different.
The first approach, perhaps the most natural, is to obtain credit for the shortest possible duration. There are several reasons for this, the most obvious of which are:
So much for the strengths. I will not present the disadvantages of this approach, since these are in some ways the advantages of the second method.
In view of the advantages of a short loan, borrowing over a long period seems, at first sight, surprising. And yet, it also has a number of positives:
So how to choose? Let’s take an example. You want to invest in an apartment for a total amount to borrow of €100,000, with a rent of €600. For the sake of simplification, we will not take into account taxes, duties and any rental vacancy periods. To illustrate the principle, we also consider fixed rents over time.
Our first responder, Mr. A, borrows €100,000 over 15 years, i.e. monthly insurance payments of €728 included, starting with a rate of 3.15% and fixed insurance at 0.36%. His monthly cash flow is €728 – €600, or €128 to come out of his pocket every month.
Mr B, for a similar property, borrows €100,000 over 25 years. With a fixed rate of 3.90% and an identical insurance of 0.36%, Mr. B’s monthly payments will amount to €552. His monthly cash flow is €552 – €600, or €48 in earnings each month.
After 35 years, the verdict is final: Mr. A will have won €151,680, against €101,760 for Mr. B, i.e. 50% more. Now, suppose that in the eleventh year following the purchase, major work is to be expected to keep the property in good condition, for an amount of €5,000.
Of course, this is only one example and there are many other cases. But the idea is there. To summarize in 2 sentences: borrowing for a long time will have less impact on your daily life, but at the cost of lower profitability in the long term. By taking a shorter loan, the long-term profitability will be better, but with a potentially stronger impact on your daily life. Everything is therefore a question of balance between these 2 axes: daily finances and long-term finances , and finally short-term well-being and long-term well-being, money not being an end in itself. Obviously, the 2 are not antagonists! Remember, however, that during the few years of your mortgage, you can change the duration, upwards or downwards, by adjusting your monthly payments or prepayments. Ideally, remember to negotiate the freeness of these actions so as not to penalize you later.
I won’t tell you which is the best solution, quite simply because I don’t know: your personal context, your possible contribution, your aversion to risk, are some of the criteria to take into account in this choice.
And you, what is your opinion on the matter? Over how long to borrow for rental? Borrow less to pay less? Or longer to optimize day-to-day finances?