What should my Down Payment be?

Question

Looking to get in to my first deal. Targeting a single family home requiring zero to minimal repairs to rent out. The goal of the property will be cash flow. My thought is to hit a 70% LTV (which makes my down payment 30%). The idea is this will reduce monthly payment and increase cash flow.

The cash flows from the rental (along with savings from my full time job) will be reinvested in a second property under the same principal in 2 years with growth from there.

The question is, is this too high or low of a down payment and what have other experienced? My goal is not appreciation on the property (though some would be expected) but rather boost savings to reinvest (similar to a dividend portfolio).

Joe Villeneuve · Answer

The DP should be as little as possible. When you increase your DP to get a higher cash flow, all you're doing is buying that extra CF upfront in one lump sum, and getting it back in very small increments. You're not getting what you think you're getting.

Keep in mind, your ONLY cost is what comes out of your pocket in the form of cash. Minimize it.

Keep in mind, your ONLY cost is what comes out of your pocket in the form of cash.  Minimize it.

Tucker Cummings · Answer

Adding to @Joe Villeneuve's points, the more money you put down up front, typically the lower ROI. Let's extrapolate that out:

Let's say the house is $100,000, you paid for the whole thing in cash, and it's going to rent for $1,200/month. After budgeting for taxes, insurance, maintenance, & property management, you'll cash flow $850. $850 over 12 months is $10,200 or 10.2% ROI.

On the other hand, let's do the same house, but 20% down ($20,000 down). Now we have to factor in mortgage, which hurts cash flow. Now, I'm using these numbers because I have a house exactly like this and can tell you that it cash flows about $430/month. $430 over 12 months is $5,160 or 25.8% ROI.

These are on two different ends of the spectrum, far off from what you're proposing, but it illustrates the point of stretching your dollars and maximizing your ROI.

As an additional point, you can keep that extra 10% you have (the difference between 30 & 20 percent), and put that into another investment property, thereby spreading your risk. For example, if you have one property and it goes vacant, you're at 100% vacancy. If you have two properties, one goes vacant, you have 50% vacancy, and so on.

Lastly, if you spread out your investment, you'll capture appreciation on multiple properties rather than just one.

Hope this helps!

Joe Villeneuve · Answer

30% down means you are paying $10k to save $600/year.  That's what is happening here.  Let's extrapolate that out:

1 - You're spending $10k2 - You're getting $600/year3 - That means, it will take you almost 17 years before you break even, so when you reach the 15 year mark, you are actually losing money

Tyler Mutch · Answer

Let's work w/ the example above, we can use 100k purchase price, so 100k w/ 30% down is a principal and interest payment of 354.68. the same purchase with 20% down is 405.35. The net difference is 50.67 annualized (608.04).

so that 10k earns a 6% return and 50 bucks, I believe you'd be better off saving that towards purchase number two, which would probably give you more than 6% and 50 bucks a month.

Steve Morris · Answer

Well, the DP is whatever you can get the lender to go for since it doesn't affect seller proceeds.  A seller may care since a nothing-down offer would make me nervous as a broker.

However, as noted above, keep the DP low as you can, assuming you debt doesn't eat up all of your NOI.

Robin Simon · Answer

Agree with this thinking - less about the exact percentage of down payment and more about how it fits with the total economics of the deal

Carlos Ptriawan · Answer

My version of the answer: any number that would make it DSCR 1.05 or above.It doesn't matter if down is 25% or 40%.My bank would force me to use 25% anyway, and I know after all cost, I could only make DSCR 1.05 when downpayment is 40% in certain location.

I personally hoping for Fannie mae to raise this down for investment property so less speculation is induced from this activity LOL

Patrick Rabalais · Answer

Thank you all for the reality check. My mind was rooted in risk mitigation when I should be looking at this from a growth perspective.

A higher DP forces a cash flow. The real trick is finding a property that will cash flow for as little equity as possible.

Tyler Mutch · Answer

@Joe Villeneuve Awesome, Thank you for putting that into a much more clear and concise way. I didn't even think to look at the fact you would be losing more at that point. Thanks!

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