How much of a down payment should I put on my primary residence?

Question

Hi everyone,

I'm a new investor and I am looking to buy a primary residence as well as a (separate) investment property. I have the money to put down a large down payment on my primary residence, or possibly buy it outright, but should I?

I have heard some RE gurus advise not to use debt to buy anything that does not create income (i.e. doodads). And my primary residence would fall into that category.

But if I put a little bit down and take out a loan for the rest, then I could take advantage of the low interest rate, first time homebuyer specials (like FHA loans), and that would leave me more money to invest with.

I really don't know how long I would stay in this home - it would be a starter home and I would likely move out in a few years, and maybe rent it out for income.

I would like to hear your thoughts and advice on this. Thanks in advance.

Mike

Vikram C. · Answer

Many sellers will give a fairly significant discount if you are a cash buyer and can close quickly without a financing contingency. So it may be worth making low-ball cash offers on a few properties that you like and seeing if you can get a great deal and then refinance at a comfortable LTV and invest the proceeds into your investment ventures. I once had a buyer who claimed to be a cash buyer, got a discounted price from me, and then went ahead and financed the deal. I did not object because he was able to close by the deadline and the financing contingency did not exist. So you can do this as well if the loan terms are better for an acquisition than a refinance.

Account Closed · Answer

I like to have my primary paid for. It has to do with comfort level. A couple of considerations: If you have all cash, you can make insultingly low offers and get yourself a real bargain. Cash is a very strong position for offering on foreclosures. If you do not have a mortgage on your home, your debt to income ratio should be exceptionally good and make it easier to obtain financing for a rental property. I'd pencil it out. Free and clear home with a mortgage on a rental vs a lower mortgage rate on a home and a free and clear rental, vs financing everything and buying a home plus a couple of rentals. keep in mind your debt to income ratio, because banks aren't so generous about considering rent as income as they used to be. My opinion is that this is not a good market to get over-extended. It's difficult to sell if you discover you can't make the payments, and the tenant pool is weak, with some tenants losing their jobs with the weak economy. So be very conservative when you figure possible income from the rentals, so you don't get yourself backed into a corner.

Mitch Kronowit · Answer

In general, I prefer as small a down payment as possible, but that has to be weighed against other factors, like paying PMI (flushing cash down the toilet). The ability to purchase the entire property outright is an enviable position as well, but then you have to start looking at opportunity costs, i.e., what else can you be doing with that money? In between paying all cash and 100% financing is a happy medium where you can get good finance terms without draining all your bank accounts. After all, what good is owning a house outright if there's nothing left for groceries?

Account Closed · Answer

If you are planning to invest in other RE, it makes sense to keep your home leveraged at a comfortable level. Use the remaining cash to find investment property(s) that will cash flow. It is less expensive to put a smaller down payment down rather than trying to refi later to pull out cash to invest with.

Steve Babiak · Answer

Rich - all good points. One thing that W-2 earners have to watch is that personal residence mortgage interest deductions phase out as income (AGI) goes up; if in that situation, it is actually best to have mortgages on investments where interest is always deductible, and no mortgage on personal residence (where deduction would phase out).

Rich Weese · Answer

Mike L- Fullerton!! My birthplace and the home of Weese Investments, 2701-2751 E. Chapman Ave. Go past it and see if the two buildings are still called Weese Financial Plaza. I bought it 35 years ago and made my money there. As to your question. I also agree to keep the equity low. You're really buying an investment property, that may be sold or may be rented out in the near future. Therefore, minimum down with manageable payment, keep ADAQUATE reserves , and buy some more property . Rich

Bill Gulley · Answer

Didn't really follow the post just above mine....? Anyway, anything above 80% LTV in one loan, will require MIP or PMI which is a premium for insurance to cover a per centage of the loan in the event you default. When you factor this in, your effective rate or APR will be higher. But, so long as you payments are manageable, and since you intend to sell or lease the property in the future, obtaining the higher loan is probably a good bet. I hope you're going for a fixed rate! Keeping you cash in this situation is a wise move, IMO. Good luck, Bill

Edwin Brown · Answer

Cash is king! Although many folks may vehemntly disagree with this, i am always in favor of keeping more cash in my account. If you can buy with less downpayment, i would do it. Conserve your cash. The more you have the more banks will loan to you without you having to use it. Also, in this business, you never know when you'll need to replace an air conditioning system or something else expensive. Cash is King

Steve L. · Answer

I just bought my primary residence free and clear, I got a big discount about 25% for going that route. The refinance process has been pretty difficult. If you can go FHA... that would have been my first choice.

Mark Updegraff · Answer

Buy your investment property first and get it leased so when you go to buy your primary you can use the income from the rental. Otherwise you're going to ding your Debt to income ratio when you buy your primary first.