Higher Down For More Cash Flow?

Question

Hello Bigger Pockets Community,

I was just wondering since LA is such an expensive market, what would be the pros and cons of paying a higher down in a well appreciating area to stay afloat with positive cash flow in places like Los Angeles.

For example, my biggest struggle right now is finding a property in the greater Los Angeles area that will provide cash flow but at the same time not fall behind on appreciation in comparison to major urban areas like Koreatown or Downtown LA.

I know that it is important to use OPM to gain max returns on the investments but there is no way I can pay close to a thousand out of my own pocket per month to make the money back and then some with appreciation. So what if I paid 40% or 50% down on a property to allow positive cash flow while reaping in the benefits of appreciation as well. Besides greater risk by using more of your own money than loans, what downsides are there to doing this as my initial investment to start my portfolio?

Once again I apologize if this is a horrible idea or if I'm ignoring some basics in real estate investing.

Thanks in advance!

Kevin Harrison · Answer

While this may be true in many ways, I think what the OP wants to do does not fall into this advice. If OP wants to invest in LA then I don't see a problem with that. The reason we say don't go for the big down payment to make something work is because too many people want to force the numbers when they start in RE. LA is one of those places where you either have to "force the numbers" so to speak or you have to find another market. It doesn't sound like OP wants to find another market.

This strategy may not make sense for everyone or provide the highest COC returns, but it doesn't mean it doesn't work at all. It also sounds like the OP is trying to pick up some of the infamous CA appreciation which might just make better returns in the end with less CF. Just my 2 cents.

Jeff B. · Answer

Last thing first - - never understood why so many dislike commercial financing, as it operates to ensure you get a cash flow - - that's what the DSCR indicates.  If you can't get approved with the bank's DSCR requirement, the the BANK JUST DID YOU A FAVOR!

The ARM adjusts periodically, setting a new rate of interest on the existing balance.  Fundamentally, this says if the balance has big declines, then so will the payment the following month.

So, for an investment property, an ARM (commercial or otherwise) gives you the opportunity to recapitalize the property with infusions of cash.

Geo Tan · Answer

Jeff Beard

I'm just under the impression that commercial loans are much harder to obtain. No idea where I heard it from and if it holds any credibility but I'll definitely keep a broader mind in terms of it!

I'll definitely look into ARM loans (Do you know if this is harder to obtain than a 30 year fixed? And what are it's cons? Since you listed the pros already) and get back to you as soon as I understand it a bit better!

Geo Tan · Answer

Hey Jeff Beard!

I feel like I'm getting some awesome information but I'm having a little trouble understanding it completely. I'm very green to the REI world so I don't know too much on the types of loans and a lot of the acronyms you just mentioned (Which I will read up on so I can understand a bit better).

Do you think you can tell me a little bit more about how you used your inheritance and turned it into a cash-cow? And any more in-depth you can get into the ARM loan (Is it harder to get approved for this? I'm planning on keeping my next property less than 4 units to stay behind that commercial line).

Thanks for the quick response as well!

Kevin Harrison · Answer

No it doesn't make those choices correct when gambling. But if you have enough money to put down to make a place cash flow in your desired market, then you are not really taking that big of a risk. OP will still cash flow monthly, has a chance for appreciation, and will still get debt pay down over the life of the loan. Now if we were talking about someone with less money wanting to buy the property and operate it at a monthly loss then I would be on your side here saying "HELL NO!", but that is not the case here.

Steeve Roberts · Answer

I hear that that I must find a local smaller bank to get funded

Jacob Sampson · Answer

I don't disagree with your points.  I can only give advice based on my opinions/experience.  I don't have the intestinal fortitude to invest for appreciation.  You name an area that provides significant opportunities for appreciation and that is likely an area that crushed 1000's of investors in the near past.

I think different areas of the US provide opportunities for different levels of investors.  I don't personally think that low cash flow, ultra expensive areas are smart for beginners.  Certainly there are examples of people who end up being successful but there are examples of people winning the lottery or poker players drawing out to an inside straight.  That doesn't make those choices correct.

Russell Brazil · Answer

In major metro areas like LA...you are often going to find properties that appreciate a lot, or if you go to the outer skirts of the metro area, or the poorer parts of the metro area you will find cash flow properties.  You may find properties that have a little bit of both, but not a lot of both.  Like everything in real estate investing, it is a trade off...appreciation verse cashflow.

Jacob Sampson · Answer

Not all stocks are worth buying and not all areas are worth investing in.

Geo Tan · Answer

What do you mean @Steeve Roberts?

Higher Down For More Cash Flow?

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