Drawbacks of making a large down payment?

[Samir S.]

We are hoping to buy our first buy-and-hold property by the end of this summer. We feel like we've been analyzing properties ad infinitum and just need to take action! We live in the East Bay Area (Livermore) and would like to buy locally but what we could afford here would mainly be condos/townhomes; not sure we like not having full control over the property. We both like the Folsom/Roseville area (near Sacramento where we are from) and find ourselves in those areas several times a month visiting family. We've read the advice on not to buy any property with negative cash flow. It seems, though, that if we put a larger down payment, we can create positive cash flow. We know that reduces some leverage, but we are somewhat conservative and don't necessarily want to leverage to the hilt. The question is (and maybe there is no right answer): is it advisable to put more than 20-25% down for the sole purpose of generating positive cash flow? What are the negatives of that if we plan to only hold one or two properties for the long term? We already have a significant (to us) chunk of money in stocks and would be investing in real estate solely to diversify our holdings. Would that change the answer? Looking forward to hearing your thoughts and advice. Thanks!

[Jordan Thibodeau]

@Samir S.

 Welcome to BP. I'm from San Jose and I invest in Sacramento. Also, please add line spacing to your original post, it makes it easier on the eyes. Remember 5 sentences = one paragraph (god i hated English class).

Two things: When analyzing a property, don't mix the value/earning power of the property with your own personal financing. Because if you go to sell this property other investors will consider the former not the latter. 

Analyze the property based upon it's current asking price, and how much income you can bring in (after expenses, not including mortgage). If it turns out the property is barely earning a return, then it's time to look for another property.

Currently the market in Sacramento is starting to heat up again, so price to income values on properties I'm seeing is high which means the return on investment is low. Now doesn't mean you can't find a great deal, but it means you will have to look harder for it.

Think, if you took the same money and threw it into a 401k, you would earn a tax and effort free return in stock somewhere around 6%~ a year (Based on historical returns from 1800s to today). Now if you took that money and invested it in a over priced piece of property, you would now earn a lower return and you would have to spend a lot of time maintaining it.

Regarding a larger down payment, I'm all for that because it means your mortgage payment is lower and you have a higher margin of safety, HOWEVER, if the underlying asset is not returning much, I wouldn't advise increase in the down payment to make it look as if the investment is doing better than it really is.

I say to thee KEEP LOOKING and BE PATIENT. You'll eventually find a good deal.