How much cash?

[Eric D.]

What are your thoughts about how much cash to put down on an investment property? I have heard some say you should only put down enough to get a mortgage for the rest, i.e. like 20%, while I believe others say you should only invest all cash so you do not owe any money on the property? With the former, you can get a bigger property or else risk less of your own money. With the latter, you are increasing your cash flow, but with an outlay of a lot of money.

[Furthermore, I live in New Jersey, and the numbers do not work to provide a cash flow if you finance 80% of a property, because housing prices and taxes are so high. So I assume the answer may be different for states like mine]

What are your thoughts?

[Jay DeCima]

Eric

I posted this recently to a newbie.

For the last 40 years I invested in Northern Calif, primarily in groups of homes situated on a single parcel. This has worked well for me and at my high point I had 200+ simple rental homes. Since banks won't finance ugly (when purchased) groups over 4, then 80-90% of the time I got seller financing, with about 10% down. My fix up costs were about 10% of purchase price for a light fixer and 20% for a heavy fixer.

One of the things that I have taught my students over the last 30 years is HIGHEST AND BEST USE (of real estate) IS INCOME:

When I began buying investment properties, there was no question in my mind whatsoever about where I might find some extra money if my properties didn’t provide enough cash flow. The answer was clear to me the day I started — I couldn’t! Even though my cash down payments were quite small, it was all the money I had. I knew very well there was nothing left in my bank account to make up for monthly cash flow shortages. The only funds I would have to pay my mortgages and expenses would be the money I took in each month from my renters. Obviously, buying properties this close to the belt is both challenging and exciting. There is little room for buying errors as you might well imagine. You definitely need your cash flow plan worked out before you sign the deal!

What I’m suggesting here — For most of us, it makes more sense to buy cash flow properties with uncertain futures than to acquire high potential properties without enough cash flow to operate them today. Future potential is great — Don’t get me wrong, but it’s still “Pie in the Sky”! In my view, the top three reasons for owning and operating income properties are INCOME, INCOME and INCOME — Everything else must fall in behind.

Almost every investor I know has paid too much for income property. It happens more frequently when we first start out. There is almost no defense against paying “too much” at least once or twice. I’ve done it more times than I care to admit. However, in my case, buying multiple units fix-up properties allowed me to add value and improve the income stream more quickly than if I had overpaid for non-fixer type properties. By fixing up properties I was able to recover from my buying errors much faster because I could raise rents. The best education in the world for understanding real values and what the true expenses are – is learned very quickly buying and operating you own properties. I’m not talking about a single house here. That’s not quite enough action for me. I’ve found that multiple fixer-uppers often don’t require any higher down payments than a single house – yet the cash flow potential is many times greater. Often they come with seller financing to boot!

Hope this helps.

Fixer Jay DeCima