Does it Always Make Sense to Get the Longest Amortization Possible?

In most cases, my view is: YES.

Why?

Longer amortizations generally reduce risk and improve flexibility.

Benefits include:

• lower monthly debt payments

• more cushion if property cash flow declines after acquisition

• improved debt service coverage

• the ability to make additional principal payments voluntarily (depending on lender structure and repayment terms)

From a risk management standpoint, smaller required payments can materially reduce stress on both the property and the borrower.

Amortization Available in the Market

Generally speaking:

• banks can offer 20-30 years amortization

• older properties are more likely to receive 20-year amortizations rather than 25-30 years

• some private lenders, CMBS lenders, and debt funds may offer full-term interest-only structures

The amortization available often depends on:

1. Lender appetite

2. Property age and condition

3. Asset class

4. Market

5. Leverage

Downside to Longer Amortizations

The biggest downside to a longer amortization is slower principal paydown.

• you build equity more slowly through amortization

• loan balances remain higher for longer periods

Historically, many investors relied on NOI growth and cap rate compression to build equity.

Over the last several years, however, that has become more difficult because:

1. many properties have experienced limited NOI growth

2. cap rates have generally expanded

That means principal reduction has become more important component of equity creation that it was during prior market cycles.

My Preference

Even with those tradeoffs, I generally prefer longer amortizations when all other loan terms are equal.

Why?

Because I prioritize limiting downside risks and preserving flexibility.

Real estate cash flow can fluctuate unexpectedly, and lower required debt payments create more room to navigate difficult periods.

That said, all loan terms are rarely equal.

For example:

• one lender may offer full-term interest only, but at lower leverage

• another may require a higher interest rate

The optimal structure is ultimately a balance between:

• Cash flow protection

• Cost of capital

• Leverage

• Flexibility

• Long-term equity creation

---

I have created an analysis to show how longer amortizations reduce risks, all other loan terms being equal.

The table below shows stress testing rents needed to hit 1.00x on different amortization schedules.

Example: a 20-year amortization requires rents to be $60 more than the 25-year amortization

Some observations:

• The difference between 25 and 30-year is only $30.

• The bigger moves are from 20 to 25 and 30 to IO. $60.

The table below shows the assumptions used in the analysis.