Cash Down vs. Cash Flow

[Joel G.]

Edit: Not sure if this is the correct forum, but I'm not sure how to move this to another forum, my apologies. 

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Hey All,

I've had a general question and I'd like to see what BP's thoughts are on it. 

I'm in the process of buying a property and am looking to get a conventional loan with 5% down. In analyzing the income/expenses, it becomes pretty obvious that if anyone increases their down payment, there is a "tipping point" where a property will begin to "cash flow", and eventually meet ever metric we all talk about (i.e. meets the 50% rule, cash flows $200/door, exceeds CAP and DSC, etc...). I'm interested in knowing how you all account for the down payment and cash you put in into your analysis? Do you calculate each of your metrics assuming 5%-20% down? Or do you automatically assume 0% down on all deals in order to have a decent comparison between properties?

I personally have been keeping the 5% down in my calculations use this to figure out the cash flow per door (assuming a property is 95% financed); however, I feel like I might be missing the mark on this. Thoughts? 

[Albert Bui]

HI Joel,

95% LTV with conventional financing can only be done with owner occupied loans. Are you planning to live there then leave and rent?

Yes if you keep putting money down  you can get cash flow but you lose the liquidity and opportunity for each dollar you sunk into the property to earn a return. Additionally your cash on cash return is decreased on a percentage basis.

Unless if return on your equity or cash on cash return is not important and you had unlimited amounts of capital to invest then the above would be fine.