If you can put 20% down, should you?

Question

House hacking teachers commonly say "put 3.5 to 5% down" and rent out the other side.

But if you're able to put in a 20% down payment, should you?

When people model cash flow is it assumed that 20% down payments are used?

I look at many houses that cash flow well with 20% DP but not a 5% DP.

Bill B. · Answer

You can earn a guaranteed 6-7% return plus you pay less origination fees plus you don’t pay another percent in PMI?  If you have a guaranteed 10% after taxes return, put less down. Otherwise your upside is finding a 9% deal to make an extra 1% on $50k? A $500/yr savings is the perfect result? Not finding another deal is a 7+% loss on that $50k? $3,500/yr?

The least down possible was THE play when mortgage rates were 2.5-4% you didn’t need to earn much to beat that. The stock market exploded because you only had to earn a 1 or 2% return to beat the guaranteed bank return. Now you have to earn 6%, same theory.

Ray Hage · Answer

That's a tough question based on very little info so you'll hate the answer to this, "it depends". Most places won't cash flow with under 5% down.

Let's say you have enough to put down 30%....So here's a scenario where you put 5% down. You buy a duplex and rent out one side, let's say your CoC is -3% and that shoudl be fine. 3 months later, you can buy an another property as well that is getting an 8% CoC. Now you have two separate properties vs just one in buying your primary duplex with 20% down.

For your primary, put the minimum down. For investment properties, you may HAVE TO put a bit more down to get a reasonable interested and CoC return. If your RE goal is just to have a primary and you don't plan on other investments, then sure, just put in a big down payment

Marcus Auerbach · Answer

Depends on what you want to do AFTER the first property. About half of our clients buy a second duplex after one year, which is the required owner occupied period. So you could keep half of your downpayment dry for the second one.

Not being able to buy a second one is called opportunity cost. But if you don't intend on a #2 then 20% makes sense, between lower payments and no PMI it's a worth while ROI.

Milwaukee is super competitive, so FHA is often a non starter to get an accepted offer in most cases, a conventional loan with a higher down payment is much more attractive to sellers.

Chris Seveney · Answer

@Evan Swanson

What’s your interest rate compared to what are you going to do with that money? If it is having you save 6% interest to go into a bank account that gets 0.1% then yes it makes sense

It’s also what is your level of risk if the property drops in value - do you still have that cash to recover?

Like 99.999% of questions on BP - it depends but I would say yes your better typically putting more down when rates are higher if you do not need that cash for other things

Bill B. · Answer

Does your 10% vs 20% downpayment graph account for extra origination fee on lower downpayment? It’s not much but it’s added to loan balance so there’s also interest and a payment on it.

Does your 10% vs 20% downpayment account for PMI? Same thing. It’s not a huge amount but it’s added to your loan so more fees, more interest, higher payment.

The easiest way to explain is I believe everyone here would agree you’d NEVER put down 19% and pay PMI instead of 20%. So either 20% is always better, or it’s better down to a certain percent. The PMI would be equal to 50-100% interest rate at 19% vs 20%.

if you’re a flipper, great out down as little as possible, you will be buying lots of properties and that’s how you use cash as a tool. But I think too many people focus on cashflow with long term holds. Loan paydown is just as real as cashflow and that’s how I use cash. If cashflow is really the goal, pay off your loans a fast as possible. You can live comfortably on 5 paid off properties and you sleep soundly at night.

Evan Swanson · Answer

Well, in % terms 10% shows a greater return but in absolute dollars 20% shows a better return. So that part is still cloudy for me. Any more thoughts on that?

But I see what you mean by comparing money not invested to the mortgage rate.

If I decided on a 10% DP and and not 20%, saving $25,000 on the DP, then the cost of withholding 25,000 of equity is an additional 25,000 of debt at 6.7% interest ($1675/year). So, unless I can find a place where that $25,000 will produce me more than $1675/year (6.7%), just include it in the DP.

If that money just sat in the bank or wasn't invested at a better rate (other business or rehab resulting in material increase in home value), then I just took on more debt and interest for no reason.

Eliott Elias · Answer

A 20% down payment will allow you to cash flow more. Most can't put 20% down. If you can, you should.

Theresa Harris · Answer

It may be different in the US, but in Canada, if you put 20% down (or more), you don't have to pay for mortgage insurance.  I did the math many years ago the the cost for mortgage insurance was about the same as 20% of the purchase price-you just paid for it over time.

John Morgan · Answer

I would in today’s environment with higher interest rates and less cash flow. But not 2 years ago when interest rates were 2.5% or less.

If you can put 20% down, should you?

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