Larger down payment or negative cash flow?

Question

Hey all,

I've been working with a realtor in Austin, TX looking at buying rental property in the area. Based on our research, it's going to be nearly impossible to cash flow in the area unless I bump up my down payment to ~35-40%.

Does it make sense to pay the 40% down payment and get a positive cash flow or stick to the 20% down and possibly get two separate properties but both with negative cash flow? Austin's also a really hot market and is expected to continue to appreciate considerably over the next 10 years.

Beau Fannon · Answer

Higher down payments are investments. Negative cash flow is a boat anchor.

Here in Austin, we play the appreciation game. It's a dangerous game IF the market heads south and scares most out of town folks like @Christina Linn and @David Cardoso. Many equate it to catching a falling knife when times get bad. A higher down payment insulates you from market gyrations.

Negative cash flow is an instant boat anchor on your ability to finance your future investments and your day-to-day life. If you become injured and unable to work, the negative cash flow will be your financial undoing.

So ask yourself, what's more dangerous? Catching a falling knife or swimming with a boat anchor tied to your neck.

Andrew W. · Answer

Most importantly, what is your investment goal?

There are still homes in the surrounding area that will be slightly positive cash flow with 20 or 25% down. Check out Pflugerville, Kyle, etc. There you can find some homes for ~$190-$210k that rent for $1500-1600.

Kris Wong · Answer

I love living in Austin, but I am not looking for investments here. I am investing out of state, for the reasons mentioned in the OP. If you have cash to burn and are looking to play the long game, w/o the monthly cash flow, then buying here with a larger down payment may help you achieve your financial goals. It's not for me.Never set yourself up for negative cash flow, or you have created a liability, not an asset.

Antonio Esquivel · Answer

Great advice!I want to add to this as well. If you are looking for bank financing after you buy a negative cash flow property it will make it tougher as well. Banks will look at your negative cash flow and deduct it from your income- thus hurting your debt to income ratio.

If you really think you can make it with appreciation ask yourself how high must the property go up to make it worth your time? Say the property goes up 10k in 2 years. After expenses, was it worth it? Maybe, maybe not. What if it went up 50K in two years? Maybe then it would make more sense. Study the market and see how much the area has gone up every year for the past 4 or 5 years. Also look at current trends-are there more employers moving in? ect.

I personally love Austin and have some family there. Keep Austin Weird!

Scott Anderson · Answer

Make offers that cashflow.  If I made offers at market price I’d never cashflow.

David Cardoso · Answer

If you use a Cash on Cash Return (CoCR) spreadsheet you can see that increasing your downpayment may be able to increase your cash flow but it will reduce your CoCR. This is an important metric because it will help you identify how you can use your money more effectively. If you have to pay down more to make money your CoCr is way too low for the property to be considered viable. Do these properties meet the 1% or 2% Rule?

Jeremy VanDelinder · Answer

@Manav Mandhani I have to agree with some of the advice above. Yes, Austin is more of an appreciation market (which is why I won't buy, for example, in Killeen--no offense to our Killeen friends), however I still don't buy anything here that is going to be negative cash flow. To me the appreciation is a bonus, not my 'go to.' Our buy-and-holds tend to be out here in the suburbs as @Andrew Watson mentioned.

I will have to admit, however that Andrew's other point is correct--it really comes down to your goals. If you plan to ride the market for the long-haul and you don't intend to accrue a lot of units, you can weather more fluctuation and lean in to appreciation more. When you look at COC it may not be as good, but when you consider your IRR it might be solid.

Christina Linn · Answer

I would NEVER invest in something that I couldn't put 20% down on and have positive cash flow. If you can't find it I suggest waiting until you can or investing elsewhere.  It does not make sense to have negative cash flow in an investment; that's counter productive.

Bob May · Answer

Lots of great advice on this one.  This is the age-old real estate question...appreciation/safety vs. cash-flow and potentially a higher risk.  Austin is a great market, but if you want cash-flow (or even break-even) you will likely need substantially more than 20% down unless you are able to find something that needs work, in a fringe area or both. There are still pockets where you can find deals, but you have to be ready to pounce when you see it and likely no bigger than a duplex or fourplex.  If you are looking a SFR it's even more difficult.  Good luck.

Cody Z. · Answer

Hi Manav,

I would focus on where you're finding your properties (DM, Online, etc. vs. Realtor / MLS) to solve that problem. Another idea would be to find a properties where you could "flip the script" and change it's value. An example, would be a SFR that you can add additional bed / baths thus improving cash flow and value thus reducing your down payment when you refi. Food for thought...

Larger down payment or negative cash flow?

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