Does a 40% Down Payment Ever Make Sense?

[Erin Hong]

Hello everyone! My husband and I are investors and have 3 doors in Los Angeles - all LTR. We're interested in STRs, but given the current interest rates are nervous about having to keep an STR afloat if/when the property isn't performing well. We are considering putting 40% down with a conventional mortgage to ensure that we can make payments on a bad month... and wondering, does this ever make sense?

For some background, we'd be pulling this capital from a stock portfolio in which we are very over-invested in one industry, so my husband is eager to divest a good amount and put it in RE. 

TIA for your thoughts and input!

[Stacy Raskin]

@Erin Hong, 40% down will help with getting a better rate as loan to value impacts the rate if all other details are equal. The middle mortgage FICO score will also impact the rate. If more than one person is on the loan, it will be the lower score of the two. 

If you decide to go DSCR, below are some more factors. '

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? Is your DSCR ratio greater than 1-meaning are you cash flowing. Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

This property cash flows. 

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.