Why put more money down?

Question

Hello BiggerPockets! I’ve been studying everything I can find about Real Estate, and I’m finally getting close to saving enough money for a down payment on my first property, so I’m getting more serious about it!

As I’ve been reading, I’ve started to wonder - when buying an investment property, is there ever a reason to put more money down than the money lender requires?

For example, if a bank approves me for a loan with 20% down, would there be a situation where I would want to put more than that down? The more money I use in the down payment, the less my cash on cash return will be, and the farther I will be from the down payment for my next property. This seems especially applicable to using an FHA loan to buy a house - if I can just put down 3.5%, is there an advantage to putting down more? (The only one I can think of is that I think there are some kind of monthly fees if you put that little down).

In my mind, it would be better to put as little down as possible and save the rest up as a start on the down payment for your next property. Is that true, or am I missing something?

David M. · Answer

@Val Ault

Basically, that is correct.  When you have little cash, you pretty much have to use leverage.

This concept has been touched on before.  Basically, it all depends on your financial situation and goals.  Some people like free and clear properties since it maximizes their cash flow and minimizes risk of expenses to cover during vacancies.  That’s a scenario I would like to be in for my retirement, for example.

However, all the “regular” issues arise.  For example, what if you put little down, there is another real estate market crash, and you need to sell?  Well, now you are under water and can’t sell (assuming you can’t come up with the cash to close).

As I’ve written about before, I had for a ‘consolidation refi’ where I refi’ed three loans into two.  Now I had one property free and clear and two properties leveraged to the hilt.  My portfolio of properties looked better cash wise, but two looked crappy because they were so heavily leveraged.

I hope this helps.  Real estate investment has so many possibilities and potentials, there really isn’t always a “right” answer.  It depends so much on your circumstances, goals, emotions (let’s face it, emotions can play a big part of this).

David M. · Answer

@Val Ault

Exactly...  just as some of the books said...  grow your portfolio with max leverage.  Then, in 30 years you’ll have many properties fully paid off and lots of equity.  If you didn’t leverage. You’d have a few properties giving you lots of cash flow, but not on the same scale as if you leveraged and waited it out.  Leverage in real estate investing is like compound interest in a savings account.

I’m glad you’ve got it!  Stay safe, and good luck with your investing.

Steve Morris · Answer

if a bank approves me for a loan with 20% down, would there be a situation where I would want to put more than that down?

Well, if you're approved, I'm of the school of thought you do as high LTV as you can.

The only reasons why I might put more down:

1) I have enough cash reserves for emergencies already

2) Sleep factor of less debt

3) Recheck your CFBT with/without.  More debt means less CFBT.  So more down is buying you more CF down the road.

Justin B. · Answer

I think it depends on your financial situation and goals.  First, never buy a bad deal.  If you are talking about 20% down and you think you need to go higher on the down payment just to get a positive cash flow, that's almost never a good idea (or a good deal).  That being said, if your financial situation says that cash is hard to come by, and the cash flow is decent at 20% down, I wouldn't put any additional down.  An assumption I'm making here is that you're investing for cash flow.  If your goal is to own properties outright, my response might be different.  If the cash on cash return is decent, I'd say go with the 20%.  That means it will be sooner you can find the cash to get your next property.

The caveat here is that if you can recoup the extra money down because the interest rate is MUCH lower (like 12-24 months), it might be worthwhile to go higher, but that's rarely the case.  At least it never has been with me thus far. An extra 10% down to get a quarter-point lower interest doesn't make much sense if cash flow and building your portfolio as fast as possible is the goal.

Elise Marquette · Answer

@Val Ault you can get better interest rates by putting more down. The more you put down, the more skin you have in the game, which makes it a safer bet for lenders. If you put 20-25% down on a non owner occupied multi, then you can avoid PMI. However for FHA, you will have mortgage insurance for the life of the loan, no matter how much you put down. Additionally, the more you put down, the smaller your loan amount is, which will lessen you debt to income ratio when qualifying for a mortgage. A lower debt to income ratio usually gets you better rates.

Val Ault · Answer

You guys make some good points - if I planned to invest in the property for a long time, it might make sense to go for the lower interest.

And David, we’ll said - I guess it depends on your goal. My goal is early financial freedom, so I’m looking for fastest growth, and it seems like that would almost always be highest if I put as little down as possible so that I can start a fund for my next property.

Joe Villeneuve · Answer

You are correct, for the reasons you mentioned and more.

Chris B. · Answer

Interest rates and lower fees like PMI. If you plan to invest long term in the property, these make a difference.  More down helps over the life of the loan.

David M. · Answer

@Robert Schulmeisters

I believe that’s for an investment property.  Min 20% down, but best rates is min25%

Robert Schulmeisters · Answer

I read somewhere, so I may not have this correct, But when you put down 21% or more down, you get breaks in premiums and interest rates.  If so how much difference could that be with todays cheap money?

Someday interest rates will jump up, so maybe then??

Why put more money down?

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