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

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Levi Blum
Property Manager · Member since 2021 · 9 posts · 4 votes
4y
Joe,
As a lender if you do a cash out refi on the current home, you will have a monthly payment to repay it, plus a second loan on the purchase of a new home, I am not sure that it make sense, unless you have made the calculation.
I would love to hear what are the going prices in your area.
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Alexander Murillo
Real Estate Agent · St George, UT · Member since 2019 · 56 posts · 30 votes
4y
@Joe Ludwiczak obviously everyone is saying it's a bad idea, but I think in reality it's up to you and your goals. If you want to scale and grow your portfolio, don't put 40% down on one house. If debt gives you anxiety and your goal is just to pay off a couple strong properties as quickly as possible and be done with it, then go ahead.
Another idea is to consider getting a heloc on the property if you were to put 40% down on it. Some credit unions will give you 80% LTV on a rental and up to 100% on a primary for example. So put 40% down, and get a heloc for half that amount and you still have the money available to use for another deal if you want
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Joe Ludwiczak
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Fairfield, CT · Member since 2017 · 5 posts · 1 vote
4y
Quote from @Alexander Murillo:

@Joe Ludwiczak obviously everyone is saying it's a bad idea, but I think in reality it's up to you and your goals. If you want to scale and grow your portfolio, don't put 40% down on one house. If debt gives you anxiety and your goal is just to pay off a couple strong properties as quickly as possible and be done with it, then go ahead.
Another idea is to consider getting a heloc on the property if you were to put 40% down on it. Some credit unions will give you 80% LTV on a rental and up to 100% on a primary for example. So put 40% down, and get a heloc for half that amount and you still have the money available to use for another deal if you want

Thanks @Alexander Murillo - that’s an interesting angle with the heloc. I can totally understand how the 40% down is counter intuitive if you’re in growth mode but I’m not looking to scale in that way, possibly ever. I like the positive cash flow now and having a couple of properties that I’ll hold for (likely) decades and will appreciate well overtime. And at the end of the day, I’m still financing the larger down payment via the cash out refi on my original property so it’s not, in my mind, the same as having worked to save up over time for that large down payment.

As I’m newer to this, I’m sure I’m missing things but appreciate all the feedback.

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