Higher down payments against rates/recession?

Question

Hi all!

So I’m almost closed on my second SFH home deal here in Salt Lake City, Utah.

I’d like my next deal to be a cash flowing deal (which the SLC deals are but just barely).

My strategy at this point is to buy 1 new primary a year (in appreciating markets), and then an additional cash flow deal per year (in better cashflow markets).

However, with the higher interest rates, it seems to me (and I could be wrong) that it’s harder to find cash flowing deals.

So either I have to find really select deals that cash flow, or alternatively put more money down on deals so they cash flow well.

Iv been debating putting 30-50 percent down on multi family properties in quality cities. Or maybe even buying some cash. However, I know (or rather I’ve heard) that putting lots of cash down on deals isn’t desirable as it limits growth. In full honesty, I don’t completely understand why it’s so undesirable. If I have one quality property, and I’m getting great cash flow from it, even if I put down more money that seems better than 2 or 3 properties I put a minimum down on and I’m seeing very little to no cash flow on… still reconciling this.

As a newbie, I’m not sure which strategy to employ at this point. My questions specifically are

1. How much should I be putting down on properties to help them cash flow given interest rates. Seems like more than 25% is necessary in a lot of circumstances.

2. If I put a lot of money down, or even buy cash, and we enter into a recession then it seems like I’m kind of vulnerable from that angle too. How do I reconcile this?

3. Do investors putting minimum down see any real cash flow at this point? More than a couple hundred bucks a month? It may be I’m just not experienced enough to catch those deals at the moment.

4. What are good COC returns numbers looking like at this point for you? I’m aiming  for 9% minimum. In your experience are you able to find much better than that?

These are a little broad, but would really appreciate Any and all thoughts as I navigate starting my investing career and these crazy economic times.

Thanks!

Logan McKay Zylstra · Answer

@David B.

You're not wrong about it being harder to find cash-flowing assets. Higher interest rates and the appreciation in home values have made it more challenging to find cash-flowing assets.

Investors typically like to put as little down as possible for a few reasons. The first is that interest on a mortgage is deductible. Next is leverage. This kind of hits the point on what you mentioned about being able to do more deals with less money. However, leverage also allows for appreciation to yield a higher return. For example, if you buy a house cash and it appreciates 5% in a year your cash on cash return is only 5% (excluding cash flow and expenses for simplicity). However, if you buy a house using 25% down (1/4 of what you used in the previous scenario) and your cash on cash return would be 20% in one year.

It really comes down to your personal investing style and risk tolerance. It seems like your goal is cash flow, so don't be afraid to put down more money.

Q2. What do you mean by vulnerable? Yes, you may be upside down on what you paid for the property vs. what is worth, but if you don't need to sell it for the long term there is no risk.

Q3. My investors are not seeing cash flow for the most part. They want to put their money into assets where inflation will not eat away at their buying power.

Q4. My target was 10% for a long time but now I am looking to buy in the path of development and just hoping to float the property with the rents.

Erik Estrada · Answer

@David B. You can also negotiate the price, considering there are generally less qualified buyers on the market. Also because of this, you won't have to worry about dropping your appraisal contingency. Another alternative is buying down the rate, if you are looking to maximize your longterm cash flow, but it can be costly. If it is a short term hold, you could consider an ARM loan or an interest only. Lastly there are also 40 yr fixed rate programs available which can offer a lower monthly payment, but more spent interest over time.

Kevin Douglas · Answer

Hey Dave - Great post! I love that you are getting into the game.

IMO, I wouldn't necessarily count on appreciation. We are currently seeing the market turn and it might be years before prices to get back to the recent highs. Take a look at is COC ROI on a deal by deal basis. If you can still qualify for a conventional loan, maybe at 5.7%, look to see what your cash return is after PITI, I also include management, repairs and vacancy in my model. If you get a better return with a mortgage vs. holding it in cash, go with the mortgage. Look at all your options at different down payment levels. Usually a lower LTV will lower your interest rate... Also remember, conventional loans can be refinanced once rates drop back down...

Personally, I can't get conventional financing anymore because I own to many properties so I use a private lender that has a 30 year product... They are offering 6.5%+ even with low LTV.... So I recently I just kept the cash in the deal and am experiencing a 15% return in just cashflow, much better than what you can get in any passive investment...

Higher down payments against rates/recession?

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