10% down or 20% down???

Question

First time investor here, please bare with me! Tomorrow, I am meeting my realtor for a tour of my first multifamily house hack. It’s listed at $289k. I have $50k plus about 7k in the bank.

Closing costs are 2.5% - $7250. Seller and buyer commissions are a total of 6% - $17,340. This is my first time buying a home and let’s just say I learned a lot about these fees. Call it $25,000 in fees.

The downstairs unit will rent out for 2000 a month. The upstairs will rent out for 1750 a month. Property taxes are 650, insurance 160, outsourced property management takes 10% of the rent,  and another 10% of the rent is set aside each month for future repairs. 3750 x 0.8 = 3000.

$3000 profit, minus about $2300 in mortgage, property taxes and insurance leaves about $700 cashflow, when I move out.

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What would you do? Is this potential $700 cash flowing asset worth it? If I put only 10% down, I would have just enough for a 10% down payment, plus all the fees, but the mortgage will go up to $2400 plus $150 mortgage insurance, leaving only $450 in cash flow. If I put 10% down, with on time payments, I’ll have 20% equity in about a year or so, eliminating mortgage insurance.

I think I may have just answered my own question, but is it worth it to put only 10% down, and waiting for the equity to build to 20% in like a year and a half, or to bend over backwards, take out a loan and go in with 20% from the start?

Oh, and I also qualify for an FHA loan, since this is my first home, so there is also that option to. Not sure what to do!!

Henry Clark · Answer

OP.  Sit down with you Realtor and pose this info and questions.  Not tracking.

You're going to live in one of the units?  Which one?  $2,000 or $1,750?  What did you use to pay for rent where you live now?  You have to make up the $2,000 or $1,750 out of your pocket.  If you stayed with your parents for $0, then you have say, negative cash flow of $1,750.  If you currently rent for $2,500 and take the $1,750; you have additional positive cash flow of $750 for your rent situation.

Have you thoroughly looked over the capex potential issues?  Glad you are setting aside money, but if the HVAC is 20 years old, or the septic system has never been pumped, or the roof is 25 years old, etc; you will get hit with a cost before your build up enough set aside.

How stable is the other tenant?  If they leave is the market really good or how many months will you need to carry the other rental unit's costs?  Plus, you have to turn the unit over- paint, carpet, etc repairs?

If this is your first property and you are living in it?  Why are you having PM?  Plus, the PM shouldn't be over your portion of the property costs.

Glad you are looking at properties. But you have to many basic questions unaddressed.  Recommend you don't make an offer.  Join an RE group.  Walk through deals with one of them.  Keep doing deal analysis. Do you have a property checklist? Do you have a deal calculation?  Get up to speed more before doing this first deal.

Benjamin Aaker · Answer

I won't repeat others' questions that have been posted already. I will add that to your question of 10% or 20%, you need to ask yourself whether you need the cashflow or not. 10% down would leave some money with which to buy more properties. If you don't intend to do that right away then do the 20% and save the extra cash flow. This decision will also be impacted by your interest rate. You will need to look at all the numbers in your underwriting spreadsheet (let me know if you need one) in both scenarios to decide.

Jasmine Vida · Answer

Hi Adam,

The seller pays the seller commissions and (usually) covers the buyers commissions as well so you shouldn't worry about those fees.

The 10% vs 20% I feel like is a personal opinion. You can always take the extra 10% and use it to invest in something else or use it for updates on the property. Or if you want a lower monthly payment, then do the 20% down.

You can also negotiate credits with the sellers to use towards your closing costs or rate buy down. We are under contract on a property right now and negotiated $40k in credits to use to buy our rate down.

Matthew Drouin · Answer

@Adam Newman you will want to confirm this with the bank but you can’t take a loan out to borrow for part of the down payment so you’ll need to provide all the funds yourself or have a gift from someone for that which you don’t have.

If you have a gift from someone to bridge the 20%, that would be ideal.  Avoid PMI and then go to a local credit union and get a heloc after closing to gift the money back.

Have this as a tool in your tool belt but pursue use of the 3.5% FHA, knowing that you will be at a competitive disadvantage if you are competing with non FHA buyers, then you can call in the favor from your gift person.

Just know that if someone gifts you down payment money, your bank will require them to sign a letter stating that it is in fact a gift that doesn’t need to be paid back.

Magnus Wikström · Answer

It doesn't sound like a great deal generally, for the money you're tying up... FHA should change that so I would definitely explore that and redo the nrs. But your ROE on the nrs you're mentioning is pretty low...

John Lasher · Answer

What's a typical down payment for commercial multifamily?

Robert Rixer · Answer

Purely answering the 80% vs 90% leverage question, in most cases it's better to reach for that 20% down. It's tempting early on to leverage as much as you can so you can do more deals and keep liquidity, but increased cashflow especially with PMI will make you sleep a lot better at night.

David Spurlock · Answer

Where is the 50k coming from?

The seller usually pays the commissions. Although with the NAR settlement you may need your RE agent to negotiate that in.

Are you looking to purchase more RE in the near future? If so put less money down, eat the cost, and use the saved money for the next one.

Your "good cashflow?" question depends entirely on the area you are investing in. The lower the class area the higher the cashflow you should be receiving.

Paul De Luca · Answer

@Adam Newman

Why not put 5% down or go with the FHA loan if the numbers still make sense? That way, you keep more in reserves and have more to put towards your next house hack. Sure, mortgage insurance eats into your cash flow a little bit if you're putting less than 20% down but in the scheme of things it's really not that much.

Also, you won't have 20% equity in your property in a year assuming you put 10% down unless you are forcing appreciation or you somehow get some high market appreciation.

Drew Sygit · Answer

@Adam Newman yeah, not understanding your statements, "I have $50k plus about 7k in the bank" and "take out a loan and go in with 20% from the start?".Where's the $50k?

How many mortgage lenders have you spoken with to get qualified and discuss allowable down payment options?

How do you think you'll get another 10% equity after 12 months of payments?- Suggest you Google "Amortization Calculator" and run a few scenarios to open your eyes!DO MORE HOMEWORK!

10% down or 20% down???

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