20% or 25% down on Rental Properties?

[Michael Lewis]

Fellow investors, I’d love your experienced input. I’m moving forward on my second rental property and I’m curious to know if you find it best to put down 20% and take advantage of as much leverage as possible or if you find 25% is better. I’m aware that more leverage generally gives a greater COC return however my theory is that putting 25% down minimizes potential risk/exposure and increases CF. The COC difference is about 1% less. Im looking at this from the standpoint of hedging my risk. In the event there is a total vacancy or potential repairs that are higher than expected I’d feel more comfortable knowing that my PITI payment is less. I’m also considering that in the event rents drop or home values decrease I’d still possibly be able to see positive CF. These are my thoughts however I’d love to hear from the pro’s here. Thank you in advance. - Mike

[Nathan Gesner]

It depends.

Seriously, I couldn't answer this without going into detail on your personal finances. 

You get a better return with leverage but you also open up to more risk. Is the additional 5% going to break you in a downturn? Unlikely. Therefore, I don't think the risk matters much. If you were talking about the difference between 10% or 20%, then I would argue 10% is too risky.

Personally, I prefer to leverage more and hold a reserve. On a $200,000 investment, you put down $40,000 and retain the additional 5% or $10,000 as a reserve to cover unforeseen issues that almost always pop up. The protection offered by a healthy reserve is stronger than the protection offered by an additional 5% equity.