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 .

[Thomas S.]

Easy decision. Your cash is buying cash flow, the property is not generating cash flow on it's own. It will take 6.6 years @ $200/month to break even on your own cash. That is not wise investing. To test if a property is a good investment run your numbers with 100% financing. That will tell you want the property will generate in positive cash flow. If you need to put in cash then the property itself has negative cash flow and is a poor investment. This excludes areas like CA whidch is primarily faith investors.

Ideally you want the minimum amount of your own cash sitting dead in a property that will produce a descent amount of positive cash flow on it's own merits. You never want to buy cash flow unless all you care about is bragging rights with other investors. Investors that buy with cash or pay down mortgages are deluding them selves into believing they have a property that produces high positive cash flow. They don't. There is a distinct difference between investing in real estate that produces cash flow and using their own cash to buy that cash flow. If all a investor wants is cash flow there is no reason to run the numbers, every property will do that by paying cash.

Buy with minimum down and save your cash for the next one if you are still growing. If you have all the properties you want pull all your equity and invest in a income fund. Diversify, you should easily earn 10% on it long term.