40% Down to ensure good cash flow?

Fairfield, CT · Member since 2017 · 5 posts · 1 vote

Last year I opted to turn my primary residence into a rental and purchase a new primary residence. In the next year or so I’d like to acquire another single family rental property in my immediate area. At the moment however, the prices are so high that I don’t think I could get good cash flow with 20% down, even with rental prices elevated as well.

My plan was to do a cash out refi on my current rental (ie my original primary residence) and I have enough equity there that I could take out enough cash to put down 40% down on the new rental I’d like to acquire. I’d still be nicely cash flow positive on the current rental and the 40% down on the new rental would set me up to be cash flow positive there as well.

Is that a bad idea?

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

if you had a big equity run up.. sell the owner occ and pocket the TAX FREE gains up to 250k single 500k married.. thats the best tax move.. now you have unfettered cash to go shopping with.

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David Mount
Real Estate Agent · Fairfax, VA · Member since 2015 · 22 posts · 7 votes
4y
Another option would be for you to buy a 3rd property as an owner-occupant and then rent out the property that you're currently in, that way you don't have to pull the equity out of any others. Plus, you'll want to consider how many months of positive cash flow would it take to recoup the extra down payment funds. 40% is a LOT of cash to tie up if you're only making a few hundred bucks a month.
3 Reply
Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
4y
If you only get cash flow by increasing your down payment to 40%, you are artificially cash flowing. Either look to buy in another area or accept the fact that you won't cash flow as much as you'd like. Also think about getting a longer mortgage (eg 25 years instead of 20 years) as that will lower your monthly payments.
Putting down another $40K to cash flow $500 a month instead of $100 a month is not a good idea. You could use that $40K to buy another place or get a better rate of return.
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Joe Ludwiczak:

Last year I opted to turn my primary residence into a rental and purchase a new primary residence. In the next year or so I’d like to acquire another single family rental property in my immediate area. At the moment however, the prices are so high that I don’t think I could get good cash flow with 20% down, even with rental prices elevated as well.
My plan was to do a cash out refi on my current rental (ie my original primary residence) and I have enough equity there that I could take out enough cash to put down 40% down on the new rental I’d like to acquire. I’d still be nicely cash flow positive on the current rental and the 40% down on the new rental would set me up to be cash flow positive there as well.
Is that a bad idea?

Wrong. Your just buying cash flow, and since profits are made only after you recover all of your costs, and your costs are only the cash that comes out of your pocket (DP), the larger the DP, the longer it takes to recover it.
If you want to see profit of this, use actual numbers instead of suggesting what a percentage will do for you. Percentages lie...and if you use actual numbers, with $$$$ in front, you'll see what I mean.
4 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
4y
If you are really into cash flow just put that equity money into syndication, highly aggressive syndication or debt fund could offer you 6-9% cash flow with really passive involvement. Unless the house will be my retirement house or I'll be living there, I'll not put 40% down.

The thing is if you buy in the market where the inventory is much increasing right now (vegas,austin,phoenix) then you are double down on cash flow and appreciation. Just buy a REIT instead.
0 Reply
Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4y
Quote from @Joe Ludwiczak:

Last year I opted to turn my primary residence into a rental and purchase a new primary residence. In the next year or so I’d like to acquire another single family rental property in my immediate area. At the moment however, the prices are so high that I don’t think I could get good cash flow with 20% down, even with rental prices elevated as well.
My plan was to do a cash out refi on my current rental (ie my original primary residence) and I have enough equity there that I could take out enough cash to put down 40% down on the new rental I’d like to acquire. I’d still be nicely cash flow positive on the current rental and the 40% down on the new rental would set me up to be cash flow positive there as well.
Is that a bad idea?

As the others have said, you're just cheating the numbers by putting more down. The market prices are unrealistic at the moment. You have to stick with the numbers or wait for property values to stabilize, which may take 1-2 years. Don't try to force cash flow by cheating the numbers.
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4 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
4y
if you had a big equity run up.. sell the owner occ and pocket the TAX FREE gains up to 250k single 500k married.. thats the best tax move.. now you have unfettered cash to go shopping with.
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
6 Reply
Bob Okenwa
Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
4y
@Joe Ludwiczak
If you have to put that much down to cash flow, you're fooling yourself into buying cash flow. You should find another "deal" and run the numbers at what will actually cash flow at 20% down.
2 Reply
Bud Gaffney
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
4y
Keep your cash!!!
1 Reply
Bud Gaffney
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
4y
For DP's on more properties of course!
0 Reply
Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
4y
@Joe Ludwiczak just keep looking until you find something that works at 20% down. If you put in consistent and persistent effort over time you will or you'll find another strategy! I wouldn't buy cashflow unless cashflow is your only goal.
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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
4y
No, it's not a bad idea. Leverage, in a low interest rate environment, multiplies returns. But, in a high interest rate environment, and depending on the assumptions you make for appreciation and rent inflation, leverage can actually depress your ROI.
Try playing with a calculator report to see this effect. Once you've completed the report, on the results page, you can play with the toggles and see how putting more or less down affects BOTH cash flow and CAGR on the investment.
Interested to see what you find!
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3 Reply
Conner Olsen
Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes
4y
I'd rather have 20% in the bank right now for renovations and a safety net than 20% stuck in a deal.
0 Reply
Zach Wain
Scottsdale, AZ · Member since 2019 · 434 posts · 248 votes
4y
I agree 40% is too large of a downpayment. If you really want to add properties, I agree with another member that said buy a new primary home (you get better rates than a rental) and rent your existing home out.
1 Reply
Martin M.
Member since 2021 · 104 posts · 78 votes
4y
@Joe Ludwiczak
Hi Joe, consider that it's less about % down and more about % return on your money out of pocket, i.e. the "cash on cash return". If you put 40% of the property value down. . and that gets you a 20% return every year then wonderful. But if it gets you 2 or 3%.. odds are you're better off taking that money and using it as a 20% down payment on TWO different properties instead of 40% on just this one and so on. Up to a point, it's all about the return on your money regardless of whether it's in 1, 2 or 3 properties e.t.c
As a general rule of thumb, typically, not always, but typically you want as little of your own money tied up in a property as possible, as it leaves your other money free to purchase additional properties... and build equity in multiple properties and so on. Hope this helps
1 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Martin M.:

@Joe Ludwiczak
Hi Joe, consider that it's less about % down and more about % return on your money out of pocket, i.e. the "cash on cash return". If you put 40% of the property value down. . and that gets you a 20% return every year then wonderful. But if it gets you 2 or 3%.. odds are you're better off taking that money and using it as a 20% down payment on TWO different properties instead of 40% on just this one and so on. Up to a point, it's all about the return on your money regardless of whether it's in 1, 2 or 3 properties e.t.c
As a general rule of thumb, typically, not always, but typically you want as little of your own money tied up in a property as possible, as it leaves your other money free to purchase additional properties... and build equity in multiple properties and so on. Hope this helps
I agree.
Percentages mean nothing...and they usually lie to you. Who cares what the percentage is? Dollars, dollars and dollars, is what matters. If you want to look at percentages, then make your decision based on the dollars that percentage represents...not the percentage itself.
Further more, I don't care what the percentage is as far as the relationship between DP and cash flow. The initial role of cash flow is to recover your cash (DP) ASAP. The lower the DP, the faster you will usually recover it...as long as there is positive CF. Higher DP to gain higher CF doesn't work since the higher CF serves no purpose other than to buy CF. You're paying for all the extra CF upfront, and getting it back.... s l o o o o o w l y.
Example:
1 - $100k property; CF with no debt = $10k/yr
2 - DP = 40% = $40k; Debt = $60k
3 - CF = $6k/yr
4 - Yrs to recovery = 7...
...or...
1 - $100k property; CF with no debt = $10k/yr
2 - DP = 20% = $20k; Debt = $80k
3 - CF = $5k/yr
4 - Yrs to recovery = 4

Now, if both options start with the same $100k, and both investors want to grow their portfolio using the same DP%, but only using the CF to do wo, watch the difference between the two options both in starting point and growth.

2 Reply
Michael Foster
Member since 2021 · 2 posts · 0 votes
4y
A quick question.
In this situation, would it make sense for him to get an FHA loan on a new property and turn his other two properties into rentals, so that he would have a much lower DP and the others would cash flow?
0 Reply
Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
4y
@Joe Ludwiczak
This depends on the area you are investing in and your overall portfolio.
By reducing your leverage you are reducing your risk and if the asset is in an area that has had a history of appreciating then for short term it may not look like the best investment but over time (which I believe real estate is long game) it’s another asset that continues to build wealth while reducing risk because of lower leverage
So answer is it depends if it’s a good idea or bad, but I would not necessarily exclude it because of a higher than normal down payment. The other question is what else would you do with that $?
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Jesse Carmack
Member since 2022 · 6 posts · 0 votes
4y
any suggested syndication? I’m looking at the best form of generating passive income with about 20-30k.

Quote from @Carlos Ptriawan:

If you are really into cash flow just put that equity money into syndication, highly aggressive syndication or debt fund could offer you 6-9% cash flow with really passive involvement. Unless the house will be my retirement house or I'll be living there, I'll not put 40% down.

The thing is if you buy in the market where the inventory is much increasing right now (vegas,austin,phoenix) then you are double down on cash flow and appreciation. Just buy a REIT instead.

0 Reply
Nathan Patterson
New to Real Estate · Castle Rock, CO · Member since 2014 · 172 posts · 66 votes
4y
Personally, I would not tie up 40% into one property. That is a lot of cash to not have access to. I think you should keep analyzing to find a deal that works.
1 Reply
Joe Ludwiczak
OP
Fairfield, CT · Member since 2017 · 5 posts · 1 vote
4y
Quote from @Chris Seveney:

@Joe Ludwiczak
This depends on the area you are investing in and your overall portfolio.
By reducing your leverage you are reducing your risk and if the asset is in an area that has had a history of appreciating then for short term it may not look like the best investment but over time (which I believe real estate is long game) it’s another asset that continues to build wealth while reducing risk because of lower leverage
So answer is it depends if it’s a good idea or bad, but I would not necessarily exclude it because of a higher than normal down payment. The other question is what else would you do with that $?

Thanks @Chris Seveney - it’s definitely an expensive area but one that has a good track record for appreciation as well as lesser price drops during historic market declines. I’m definitely looking long term and don’t have aspirations (at this time) to scale up quickly. My aim is to build a portfolio of 4-5 properties (likely single family) over the next 10 years. So in my mind, by putting the additional money down I’m not eliminating my ability to move on another rental acquisition in the short term and I like locking in a lower mortgage so I have a nice buffer on cash flow if rents go down (they are quite high at the moment).

I can certainly appreciate the broader feedback on not locking up the money.
Thanks very much

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Joe Ludwiczak:

Quote from @Chris Seveney:

@Joe Ludwiczak
This depends on the area you are investing in and your overall portfolio.
By reducing your leverage you are reducing your risk and if the asset is in an area that has had a history of appreciating then for short term it may not look like the best investment but over time (which I believe real estate is long game) it’s another asset that continues to build wealth while reducing risk because of lower leverage
So answer is it depends if it’s a good idea or bad, but I would not necessarily exclude it because of a higher than normal down payment. The other question is what else would you do with that $?

Thanks @Chris Seveney - it’s definitely an expensive area but one that has a good track record for appreciation as well as lesser price drops during historic market declines. I’m definitely looking long term and don’t have aspirations (at this time) to scale up quickly. My aim is to build a portfolio of 4-5 properties (likely single family) over the next 10 years. So in my mind, by putting the additional money down I’m not eliminating my ability to move on another rental acquisition in the short term and I like locking in a lower mortgage so I have a nice buffer on cash flow if rents go down (they are quite high at the moment).

I can certainly appreciate the broader feedback on not locking up the money.
Thanks very much

...and, whether you ever buy another property again, what you just described doing, is losing you money.
0 Reply
Paul S.
Real Estate Agent · Allentown, NJ · Member since 2014 · 39 posts · 44 votes
4y
I understand everyone's sentiment about putting as little cash down as possible, but if it's a hot area, you might find yourself with competing bids on the property and your offer with 20% or less down will get beat by all cash or a higher down payment. If in a multi-bid situation, your higher down payment has a better chance of winning out. If that's the case, you have to be happy with the cash on cash return you are getting on that 40% down.
0 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Paul S.:

I understand everyone's sentiment about putting as little cash down as possible, but if it's a hot area, you might find yourself with competing bids on the property and your offer with 20% or less down will get beat by all cash or a higher down payment. If in a multi-bid situation, your higher down payment has a better chance of winning out. If that's the case, you have to be happy with the cash on cash return you are getting on that 40% down.
...then it no longer is a deal...so you pass. If you want to be a property collector, there are much cheaper ways of doing it.
0 Reply
Long LeBusiness Member
Real Estate Agent · Chandler, AZ · Member since 2021 · 28 posts · 9 votes
4y
Hello,
how many months of the difference in cash flow can give you back the 20% difference in down-payment? Are you comfortable with that? I think this is personal reference and there is no right or wrong, but If I were you I would look at the differences and see if I am ok. If it takes 5 months to get back the 20%, sure, why not; but if it takes 5 years, I am not so sure about that.
Another option I suggest is to look at way to buy down interest to lower your rate, that will lower your monthly mortgage which can increase cash flow.
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Cody Z.
Real Estate Agent · Belmar, NJ · Member since 2017 · 370 posts · 200 votes
4y
Definitely would not be putting 40% down to make it work - cost of capital to get into 1 instead of 2 is too high.
1 Reply

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