Low downpayment VS high downpayment

[Ricardo Lemus]

Hi there! 

For today’s episode, I'm planning to purchase another rental property and have been researching various down payment strategies.

Traditionally, I've adhered to the 20% or higher down payment rule to secure better mortgage terms and avoid Private Mortgage Insurance (PMI). However, I've recently come across articles discussing the potential benefits of lower down payments in certain situations.

Given the current real estate market conditions, what are the critical factors to consider when deciding between a high or low down payment for an investment property? How might this decision impact the overall investment strategy and long-term profitability?

I'd appreciate your insights on balancing the trade-offs between initial capital outlay, monthly cash flow, and potential returns.

Thank you for your expertise,
Ricardo

[Rene Hosman]

Hi @Ricardo Lemus ! 

This is a great topic of discussion and ultimately I think depends on your goals and what metrics you personally try to maximize. 

The first question is of course, can you get a loan with less than 20% down - but I'll assume you can given that you're exploring both options.

I recently read Real Estate by the Numbers by J Scott & Dave Meyer (shameless plug it's available through the BP bookstore here) and in chapter 36 they discuss exactly this - that in some cases using more leverage can actually boost your returns and you should run the numbers both ways to see what makes sense for you. The TLDR is that if you can take the money you would have otherwise put in the property and invest it somewhere with higher returns then you could be better off doing it that way even if it means smaller or no monthly cashflow because money in your hand now is more valuable than the same money in the future. But that does not come without risk of course. And that is assuming that you can rent your property and at least break even even without a 20% downpayment - assuming it's a rental that you're talking about.