Which route would you take?

[Wayne Brown]

So I am looking into making my 2nd buy-and-hold rental investment soon and wanted to get your thoughts on what makes more sense on the loan for a 115K SFH.

Option #1 - 20% down payment (23K) with a 6.375% fixed 30 year rate. ROI 13.30% - Cash flowing $271 a month.

Option #2 - 25% down payment (28K) with a 5.375% fixed 30 year rate. ROI 14.38% - Cash flowing $362 a month.

What ultimately has more value? Saving 5K up front and controlling the asset or spending 5K to have a 1% gain on the ROI? Should I be less concerned about the 1% interest rate on the loan and always go with the 20% down payment since the goal is to have the tenant pay down the loan? Thanks for your feedback!

[Larry Turowski]

@Wayne Brown It depends on 1) what else you could do with the money and 2) whether you have access to any other reserve funds.  

If interest rates were the same the extra money down would be essentially the same as earning the interest rate.  In your case, with a lower interest rate, that $5K is earning you $91/mo in cash flow and about $11/mo in equity growth (do the math) for a total of $102/mo, $1,224/yr.  That is about a 24.5% return on that $5K.  So, unless you can earn better than 24.5% on that $5K it is worth it.