Question about down payments on a investment property

[Gerry Tenebruso]

Hi all, Is it absolutely necessary to put 20% down on a investment property? I'm trying to buy a duplex in the suburbs of Philadelphia and was told I have to put 20% down Thank you, Gerry

[Jim Kennedy]

@Gerry Tenebruso,

Many people have written and made valid points. To these I add my own comments which come from my unique vantage point: I am a CPA in Cherry Hill NJ, and over the past 12 years, my wife and I purchased, own and operate a series of residential and commercial units in 2 counties in NJ, and until recently, in Texas, too. 

1. Properties with little or no money down are great to get in the door, but there are instant snags, the biggest one is the rent. Rent drives cash flow. From the rent you will pay your PITI (princ, int, taxes, and insurance), and other secondary expenses. Whats left is supposed to be to service your debt and also put something in your pocket as profit - the reward you get for taking a risk.
2. So its easy to work the numbers and see what you need, and you can determine your own profit in the process. The snag is that the more financing, the more rent you;re going to need to service your debt. Be careful you don't price yourself out of the neighbor hood. Remember that real estate is local, and rents change state to state, town to town, street to street and block to block. 
3. If you leverage (pull debt to buy) yourself too much, you could have a hard time getting a tenant, and then you have to come out of pocket. There are two very very well known situations in NJ in the last couple years, where investors were over leveraged, and I mean WAY more than one property, and fraud was committed to the tune of seven figures in each case. It became a robbing-peter-to-pay-paul situation that spiraled out of control. Are you headed down that path? I VERY seriously doubt it, but my point is to go into this thing with your eyes WIDE open. 
4. I will also say that the less you finance, the less interest you'll pay, and you'd be surprised what a diff it can make - frequently 5, sometime 6 figures over the course of owning the property. The less interest you pay, the more equity you have.
5. Also, more of a down payment will reflect favorably in your interest rate (and you pay less interest.
6. Also, we always evaluate paying a fraction of a point to see if the interest savings are worth it. With lower interest comes a lower rent needed (or higher profit margin if you don't have to lower it). We once paid a quarter of a point, which lowered the rate. The interest we saved was more than the quarter point, so it saved us even more money, and after all, its not how much you make - its how much you keep!        Anyway, thats my two cents. 

Jim Kennedy, CPA