More equity or less money down on my first purchase ?

[Mehmet Eksik]

I am buying my first property for rental income . It is 4-plex . I have couple finance options. The first one Is putting %10.5 down 4.62 interest rate no seller concession . So I am paying 37K out of my pocket with %10.5 equity . The second one is %5 down %5 intest rate with 3 percent seller concession total 21K down but only having 3% equity . With the second option my cash and cash return higher but my cash flow is $210 lower per month . And I feel I am wasting money for having only %3 equity. Which route should I take , any input would be helpful .

[Joe Villeneuve]

Originally posted by @Brian Leon:

@Joe Villeneuve if you’re so good at math then why are you asking such a basic question of how much you should put down for the property.

 ....and I am excellent in math

[Mehmet Eksik]

Thanks for the positive feedback 

[Branden Barnes]

@Mehmet Eksik 5% down and save the remainder for repairs or another investment or emergency fund.

[Jonathan Soto]

Don't get to caught up in the small details. Put less money down for you can grow your portfolio faster. You mentioned you lookong to retire to travel the world, cash flow is the game and you will need to do that by purchasing more properties. Put the least down for you can have reserves and continue to save for the next property. Best of luck.

[John Acheson]

Mehmet, congrats on finding a plex that works at the top of the market as Australia, Canada, China (and some parts of Asia) and So Cal are on the down. But, interest rates are still climbing if you believe that 2 or 3 more hikes are in the cards. That means that you are borrowing near the top so debt service could become an issue. How much depreciation can you handle? Make a 10 year financial plan including 800 FICO, possible seasoned LLC as a backup plan, refi research if rates drop, etc. That should answer your Q.

[Matthew McNeil]

Originally posted by @Mehmet Eksik:

Thanks for the positive feedback 

 Mehmet, don't surrender yet regarding Joe's input and seemingly hard questions.  He's providing you an invaluable education.  Stay with him... 

[Joe Villeneuve]

Originally posted by @Matthew McNeil:

Originally posted by @Mehmet Eksik:

Thanks for the positive feedback 

 Mehmet, don't surrender yet regarding Joe's input and seemingly hard questions.  He's providing you an invaluable education.  Stay with him... 

 Thanks Matthew, and I don't think the questions really are not that hard.

[Matthew McNeil]

Originally posted by @Joe Villeneuve:

Originally posted by @Matthew McNeil:

Originally posted by @Mehmet Eksik:

Thanks for the positive feedback 

 Mehmet, don't surrender yet regarding Joe's input and seemingly hard questions.  He's providing you an invaluable education.  Stay with him... 

 Thanks Matthew, and I don't think the questions really are not that hard.

If I run ROI (to determine %) and take a step back, I always come up with the same conclusion; it's wrong because there are dynamic variables at play that can't be dropped into an equation. At best its subjective, which I know other BP members will argue against. Contrary to that; the numbers never lie which I feel is what you're trying to walk Mehmet through.

[Joe Villeneuve]

Originally posted by @Matthew McNeil:

Originally posted by @Joe Villeneuve:

Originally posted by @Matthew McNeil:

Originally posted by @Mehmet Eksik:

Thanks for the positive feedback 

 Mehmet, don't surrender yet regarding Joe's input and seemingly hard questions.  He's providing you an invaluable education.  Stay with him... 

 Thanks Matthew, and I don't think the questions really are not that hard.

If I run ROI (to determine %) and take a step back, I always come up with the same conclusion; it's wrong because there are dynamic variables at play that can't be dropped into an equation. At best its subjective, which I know other BP members will argue against. Contrary to that; the numbers never lie which I feel is what you're trying to walk Mehmet through.

 Look in your email.  I'm sending you a "cookie"...as in "give that man a cookie".  LOL.

You're right.  The numbers never lie...the numbers with "$$$" in front of them.  Never argue with them...you'll lose every time.

[David H.]

@Mehmet Eksik Joe is right in what he is saying. You are getting hung up on the numbers without understanding the concept behind them. I'm an engineer too but remember numbers dont mean anything without concept and they can come out totally wrong without the concept being correct. If you are trying to continue to grow your holding lis an passive income your alternative of leaving the 16k in the bank at 1% is not valid as you would use that money to put towards the next property. So add 5k to it and duplicate the deal you are planning and run the numbers there and that would be a more valid alternative than leaving in the bank.

[Mehmet Eksik]

How do you know the next property is gonna give me return more then %15 . It is hard to find a good deal . I rather wanna have less property and less headache and achicve my target cash flow with minimum amount of doors . Some might satisfy egoes with number of properties that have ...

[Mehmet Eksik]

And closing cost are very high here 

[Shawn Ward]

@Mehmet Eksik If your goal is to own houses outright, then pay a higher down payment and pay off fast. 

If you goal is to cash - flow immediately, then less equity. 

[Mehmet Eksik]

thanks Shawn 👍

[Justin Kramer]

Mehmet,

Think of it like this. You put down $10k on a $100k property and over 3 years it's value jumps 10% to $110k, you come out with a 100% additional profit return of your original cash investment of $10k. If you put down $20k on a $100k property, and in 3 years it appreciates 10 percent in value, or to $110k, you are now only up 50% of your original investment of $20k, with the $10k of profit growth, you see it's always better if there is appreciation, and your property isn't negative on month to month cash flow, to leverage OPM (other peoples money) more. 

The downside I am seeing, is how to get more loans to use your other money elsewhere. I am seeing issues with properties that cashflow in the green, still raising my Debt To Income ratios considerably.

Can you tell me where you found a 4.62% interest rate and a 5% interest rate for only 10% and 5% down? The best I've seen today is 4.62 with 15% down and a HUGE origination fee at the front of 1.5% of loan amount through Mountain America Credit Union.

Thanks,

[Mehmet Eksik]

Justin,

 Interest rates in local banks here has been  fluctuating between 4.625 and 4.75 last week. I have a perfect credit and good job. They let me put down %10.5 down and no pmi.  %5 down %5 interest loan from private mortgage broker. A caveat to that I am getting only %3 equity on that but lets me use %3 seller concession for less money from my pocket . Actually that was what my original question stemmed from . Was not sure which mortgage option is good for me . Also keep that in mind that i am first time buyer.

[Caleb Heimsoth]

can someone tell me with all this “buying equity talk” explain to me how that’s any different then sticking money in a 401k for 40 years, letting it grow and compound and then withdrawing it? I don’t get my money back for 40 years. Was it a terrible investment??

[David H.]

@Mehmet Eksik Be conservative, assume it gets 6-8% ROI. Then add this assumed deal with the one u are putting 21k down as your original deal and compare those combined numbers to putting the 37k down on this one deal. That is a better comparison than to the leaving it in the bank at 1% return option. But it also depends on your goals. Do you want one property or do you want to grow. That answer should influence your decision

[Matthew McNeil]

Originally posted by @Caleb Heimsoth:

can someone tell me with all this “buying equity talk” explain to me how that’s any different then sticking money in a 401k for 40 years, letting it grow and compound and then withdrawing it? I don’t get my money back for 40 years. Was it a terrible investment??

 Caleb, I'll add to that question;

Is having money in stocks considered "dead equity" since you're not able to leverage that money?  

An added question; if you have $250K in the market and withdraw it at the standard 4% rate per anum at retirement; how does 3% inflation figure into the equation?  

[Ned Carey]

Originally posted by @Mehmet Eksik:

If i dont put more money down , what am i gonna do with extra 16K ..

That 16K is a valuable reserve in case for when any unexpected expenses come up. 

Also it is cash that you have to take advantage of opportunities that come up. Opportunities can come that you will miss out on because your cash is tied up in the property. 

Consider the situation comes where you have to sell your property quickly and take a loss. It doesn't matter if the difference is made up from the equity in the property or cash on the sidelines. Either way you have the same amount to cover your mortgage in the event of a loss. 

I guess a fundamental question is why do you think equity is any more valuable than cash?

[Jay Hinrichs]

Originally posted by @Ned Carey:

Originally posted by @Mehmet Eksik:

If i dont put more money down , what am i gonna do with extra 16K ..

That 16K is a valuable reserve in case for when any unexpected expenses come up. 

Also it is cash that you have to take advantage of opportunities that come up. Opportunities can come that you will miss out on because your cash is tied up in the property. 

Consider the situation comes where you have to sell your property quickly and take a loss. It doesn't matter if the difference is made up from the equity in the property or cash on the sidelines. Either way you have the same amount to cover your mortgage in the event of a loss. 

I guess a fundamental question is why do you think equity is any more valuable than cash?

 either way.. most landlords have problems because they are under capitalized and have in adequate reserves to weather a bad tenant.. 

mathematically of course max leverage is the greatest return..  kind of really depends on what you do for a living and your goals.

I know in my business world NET worth is quite important for getting construction loans.. banks no like leverage to the eye balls. because they will discount rent then run your ability to borrow.. they love big equities or paid for properties.. but then again I am not in the rental side of things.. and we look for very large unsecured bank LOC's that allow us to operate the way we do.. and if I did not have substantial net equity or net worth I could never get those lines.. and more in like what you guys in the tax sale wholesaling end of it.. you make as much money on one wholesale or flip deal than a rental will make in 5 years tying up that capacity to borrow.

But for average American I am going to retire on rentals.. and they have stellar credit and can get their 10 loans and don't buy in the hood  then max leverage is the way to go to scale.. but the folks that I know that are pretty comfortable later in life have most if not all their rentals or real estate paid for.. and that's my goal.   I leave my credit for making the big dollars 10 to 50 X what you could make on rental income. that to me is a wise use of credit.

[Mehmet Eksik]

Originally posted by @Ned Carey:

Originally posted by @Mehmet Eksik:

If i dont put more money down , what am i gonna do with extra 16K ..

That 16K is a valuable reserve in case for when any unexpected expenses come up. 

Also it is cash that you have to take advantage of opportunities that come up. Opportunities can come that you will miss out on because your cash is tied up in the property. 

Consider the situation comes where you have to sell your property quickly and take a loss. It doesn't matter if the difference is made up from the equity in the property or cash on the sidelines. Either way you have the same amount to cover your mortgage in the event of a loss. 

I guess a fundamental question is why do you think equity is any more valuable than cash?

Great points Ned .  Jay has good points too. Perhaps it is harder to get loan in the future with less equity  ? I remember they were asking me about my assets /depth ratio when i was getting loan. I guess using leverage is less riskier but less  profitable  when you create passive income versus using it for active business.