Sources for Down Payments

[Jimmy Delcamp]

So to keep a long story short, I have been working with a few mentors in my area that have been helped me to step my game up. Not only do I get their experience and advice on deals, as well as partnership, but I also get to benefit from their private money resources.

Here's the dilemma:

They are only interested in a few specific areas to focus their investing on. Which is just fine and dandy. But, the area I live in, which is about 20 miles away, doesn't fit their criteria to invest in.

Now today and yesterday I have made three offers. All three were houses in the area I live in and are owned free and clear. I have negotiated with the sellers to offer Owner Carry as long as I pay them a 10% down payment. Since this isn't the area that my mentors are interested in, it leaves me on my own to figure out where to get the money for the down payments on the houses.

With all the help that Bigger Pockets has given over the years, I figure someone might shed some light on my situation. Any thoughts?

[Jon Holdman]

You're going to lose big time if you seriously buy houses for $140K that only get $1050 in rent. Even paying $119K for $1200 in rent is a loser. If you put in a decent down payment you might scrape a little cash out of that better deal. If you're 100% financed, and especially at the higher rate you'll pay for that last sliver, you're underwater all the time.

Paying $119K for a house worth $127K, or $140K for a house worth $145K is a terrible deal. Those aren't deals, you're paying full retail price. Transaction costs alone eat 10%, so if you're paying more than 90% of what you could quickly sell for, you MUST, MUST, MUST put in at least enough of YOUR OWN CASH so you can sell without having to bring money to the table. If you don't have the money up front, where are you going to get it if you're forced to sell. Much better to be down below 70% of value, or, at most, 75% of value.

Lets look at the best possible of those deals:

Rent: $1200
Expenses: $600 (50% rule, yes, it applies to you and your property)
Purchase price: $119,000
Down payment: $11,900
Closing costs: $2,380
Loan: $107,100
Cash needed: $14,280
First loan payment: $642 ($107,100, 6%, 30 years)
Second loan payment: $286 (2% minimum monthly payment on a credit card at 10%)
Cash flow: -$328 (yep, $328 a month loss)

Now, if you put 25% of your own cash, plus closing costs, into this, you at least aren't losing. Your payment is $535, giving you $65 a month, or $779 a year in cash flow. You put in $32,130, so that's a 2.4% cash on cash return.

Don't buy terrible deals like this, and if you are going to do it, absolutely do not finance them 100%.