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Updated almost 2 years ago on . Most recent reply

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30
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Jimmy Humphrey
  • Underwriter
  • Charlotte, NC
15
Votes |
30
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Larger Down Payment for "Cash Flow"

Jimmy Humphrey
  • Underwriter
  • Charlotte, NC
Posted

Hi

I am new in real estate investing and was looking to one day buy a SFD in my area.  However, the "2% rule" seems totally shot in my local market. Looking at several online tools and doing some comps on Craigslist, it seems that the only way to generate a positive cash flow is to have significant down payment on your property so you can get a cheaper mortgage (30% plus).

My question is would you ever be willing to put 30-40%+ down on a home just to generate a larger positive cash flow on a house. Or sometimes are you happy just to "break even" at first, knowing that in a few years you can refi, or that rents will likely rise, or that within several years you can probably sell the home for a profit?

I would like to hear your thoughts. Thanks,

Most Popular Reply

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13,398
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19,435
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Joe Villeneuve
#5 All Forums Contributor
  • Plymouth, MI
19,435
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13,398
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Joe Villeneuve
#5 All Forums Contributor
  • Plymouth, MI
Replied

You're rationalizing that a larger down payment is getting you a higher cash flow.  Yes, and so what.  The bottom line is it's just costing you more of your money...as in cash.  This is simple math...cash in, cash out...cash flow is only a part of it.

This is a typical deal in my market, so I'm not just making up numbers to prove a point.  Let's say you are buying a house for 80,000:

Option 1:  putting 20% down = 16,000.
*  Cash out of pocket                 16,000
*  Cash flow per month/yr          350,4200
*  Time to recover cash in          46 months/3.8 years

Option 2:  Putting 30% down = 24,000
*  Cash OofP                              24,000
*  Cash Flow per month/yr         400,4800
*  Time to recover cash in          60 months/5 years

Then you have to ask yourself, what else could I have been doing with the extra 8,000 I put down on the house?  If I put it towards another property...?

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