Banker · Des Moines, IA · Member since 2008 · 21 posts · 0 votes
Is it typical to have to put at least 10% down to purchase a property to rent? If so is there any other way to buy with nothing down? I'll be buying my first property so I don't have refi options or second lien options either. I have access to a line of credit to pull the 10% but don't want to because that payment is so high it will make the property very hard to cash flow. I also have a partner that I can use that can provide the money down but ideally want to do this solo and not worry about a partner. I'm sure there are people out there that will lend me the money as a private note rec. and if this is the only option to get 100% financing how do I go about finding these people and is there more risk in using a private party loan?
I have two banks that will do 10% down and one isn't even charging PMI and may not want to see reserves. I gather this is not the norm.
Is it normal to ask the seller to sell on contract and what is the likelihood they would?
I'm open to othe alternative ideas people have used when purchasing with little cash to do the down payment. If I do small priced units I'm able to do the cash but it seems those are hard to find and may need to do something around $100k minimum.
Peter, having a resource to lend at 90% on a NOO loan with no PMI is a homerun these days. What are you waiting for?
For the balance 10%, making you 100% leveraged, you can use any of the above options you and Jon mentioned.
Sellers are often willing to carry back a second note, you just have to find sellers who are motivated enough or are in a situation that makes sense to do so. Perhaps they want to reduce their cap gains exposure by carrying a second, or perhaps they had enough equity, it was worth the cash flow on the note. There are many reasons to why they would.
I would be careful buying with 100% leverage, and only do so with a sufficient reservae account.
Jon wrote:
"If the property doesn't work with 100% financing (even if you can't really do that), its not a good deal."
I really do not understand this opinion and disagree with it. The amount you choose to put down only changes your COC return, there is no "cost" to your downpayment. The return you get is the reward on your investment. In otherwords, the level at which your money is working for you.
There is a cost to the down payment that you use. It is “opportunity costâ€. What could your cash be doing if you hadn’t invested it? If you cash-on-cash return is 3% but you could have put it in a CD at 5%, your opportunity cost is 2%. Even though there is no outlay, loss is what you aren’t taking in but could have. It is something that needs to be considered when making any investment, what could you money be doing elsewhere?
Richard said it best.
It's not so much how much you have to put down, but how much return you're getting for that money. In my opinion that's the most important metric, return on invested capital.
If you leverage your property to 100% with minimal or no cash flow you're pretty much banking on equity creation (debt reduction) or price appreciation. I think if the current market has taught us anything it's that those two exit strategies aren't very viable right now.
When evaluating your potential investments, analyze them unleveraged first, then at various points of leverage to see where the risk and returns fall. That might give you a better view of the playing field.
Perhaps you are not receiving my point or perhaps the terms are being confused.
I would agree that there would be a "cost" if your return was below what you could have received in a CD. YOu basically "lose" the difference.
What I am refering to is when there is a sufficient gain in return, above what you could receive under normal, no risk circumstances. (Otherwise, you do not purchase the RE deal, right?!)
My point is that there is no "cost to your $ invested," only a measurment which MUST exceed your minimum requirements of your COC and/or ROI.
It is a simple decission as to the amount of return you want and then make a decision on how much or how liitle you can put down to accomplish that goal. I do not understand the thinking that you must calculate the investment assuming 100% finance. The money you put down, or invest, is the money you want to work for you, and the return is the cash flow.
Craig did elude to the fact that you can make several calculations of various down payments and calculate the return of each, and then base your decision upon that info. I agree.
My point is that a very simple calculation assuming 100% financing will tell you if the deal is good or not. If and only if the deal passes this initial screening does it merit a closer look. Then, I can start doing a detailed calculation with all the known costs and the actual down payment and calculate a cash on cash return.
However, what's a good cash on cash return? This was discussed here a while back, and there was no consensus.
As far as I'm concerned, its not 5%. That's what I can get for no-risk, no-hassle CDs.
If I can actually do a deal with only a tiny investment (i.e., a subject to, or a hard money/refi deal), then my cash on cash return will be huge, assuming the deal does cash flow. Is that meaningful?
So, what's a good return? 10%? 15%? 20%? I'm not sure. I do want to see what I'm getting, but is far from a "simple decision as to the amount of return you want".
Most people, including me, have little control over the down payment. We want to buy multiple properties, and have limited cash. So, we want to find the best deal with the limited amount of cash. So, about the only DP related choice is do we put down 10% and suffer PMI or do we bump it up to 20% and suffer the bigger cash hit.
The simple evaluation gives you a thumbs up/thumbs down reading on a deal. By having fewer knobs to tweak (really, just the expense ratio), you have less opportunities to "tweak" things until a bad deal looks good.
I do not disagree with what you have said. Perhaps the confusion lies within the words or termonologies we are using. I simply stated that there is no actual "cost to the $ invested" There is only a decision as to what tyope of return you as the investor want, and a decision can be based on the calculations.
I think we are just looking at the same picture from two different angles. Of course you would say no to an investment that only produced a 5% COC.
What is an acceptable COC you ask? The answer depends on each individual investor. For COC, I would not touch it for less than 10%. For others, maybe their min. is 15% or whatever.
I never implied that anyone should "tweak" a deal to make a bad deal look good. Ii simply stated that your COC return needs to be acceptable in order to do a deal. Thats it.
Is it typical to have to put at least 10% down to purchase a property to rent? If so is there any other way to buy with nothing down? I'll be buying my first property so I don't have refi options or second lien options either. I have access to a line of credit to pull the 10% but don't want to because that payment is so high it will make the property very hard to cash flow. I also have a partner that I can use that can provide the money down but ideally want to do this solo and not worry about a partner. I'm sure there are people out there that will lend me the money as a private note rec. and if this is the only option to get 100% financing how do I go about finding these people and is there more risk in using a private party loan?
Although I have not been successful in finding one, many investors here suggest using local community banks (portfolio lenders), who typically lend based on ltv of appraised value.
How is it possible to acquire 10-20-30 properties in a relatively short period of time, when you have to put 10% + down (that's not a rhetorical question, I'm really asking)?
Right now this issue is my biggest hurdle -even bigger than finding deals.
Fred S - I feel your pain as I am just getting started which may be different than you but our end problem is the same, how to buy a property or 1-30 properties with limited cash? I can see leveraging existing properties to get that cash but from a risk management perspective I don't think leveraging is the best route to take.
I still get anxious because I do have a local bank that will do 10% down with no PMI on a 10 yr balloon amortized over 30 years but feel I need to act quick before they wise up!!
Again, what do many of you do for down payments and where do you get the money if you don't have the hard cash sitting in a bank?
Private lenders, IRA funds (yours or others), 401k (yours or others), HML, home equity (yours or others), equity partners, and cash received from flips/wholesales, etc.
I still get anxious because I do have a local bank that will do 10% down with no PMI on a 10 yr balloon amortized over 30 years but feel I need to act quick before they wise up!!
Peter, I am also in IA, could you contact me and let me know which bank you are referring to doing 90% LTV. My email should be in my profile. Thanks.
All my lenders commercial and conventional want a minimum of 20% down and again won't count but 75% of your rental income.
Why isn't PMI kicking in for the other 10%? Is it factored into the rate? Make sure you get a clear understanding of their charges-- Sounds too good to be true. Commercial lenders won't go more than 5 years and amortize over 20 years at the most.
10% down, no PMI, will do 5 year or 10 year balloon amortized over 30 years. Rate was good <7%. It is a small community bank. I agree, it sounds too good and I'll be sure to read all the fine print. Some banks need loans that have the deposit so we can't lump all banks together and assume they all are struggling. I'll keep you posted if and when I do this.