Big or Small down payment?

Question

Hi, BP Community,I'm a brand new investor seeking to maximize cash flow quickly to build portfolio of rentals. Should I put a big down payment to get more cash flow and then use Home Equity Loan to get another property? Or should I do small downpayment to have more cash available for another deal? ...Or should I be thinking about things differently? Thank you all for your thoughts!

Elizabeth Colegrove · Answer

I personally like to put as little down as possible, leveraging them as much possible. I don't refinance them, we leave them alone. So everyone has their own "strategy"

Ben Leybovich · Answer

Account Closed - there are a couple of ways to answer your question.  The "liberal arts" approach would be to tell you that sophisticated investing precludes buying either equity or cash flow - we create both, not buy them.

A more mathematical answer would be to tell you that the 2 most applicable measurements of ROI are the cash on cash return (CCR) and the internal rate of return (IRR).  The IRR is by far the more accurate of the two because it discounts cash flows for time and opportunity cost, however both metrics in some form juxtapose the cash outlays against the cash in-flows.

With this in mind, the biggest cash outflow is the down-payment - the larger the down-payment, the harder you'll have to work to recover it and drive the ROI.

Does this answer your question?

Neil Schoepp · Answer

Account Closed  I agree with Elizabeth. That's the strategy I use. I wouldn't worry about the PMI. You can request it be dropped when you have 20% equity. I haven't done this so I'm not exactly sure how it works. If it's just a matter of an appraisal and a letter to the mortgage holder then it might be worth while.

Lumi Ispas · Answer

Account Closed mentioned, your tenants are the people that pay the mortgage, not you!

Good luck in your investment!

Kelly N. · Answer

Hello Jeff,

We like to put as little down as possible, saving extra funds for the next purchase.  We have been using conventional financing, 30 year fixed loans, so that means a 25% down payment (20% if we went with a SFH instead of multi family).  We have no plans for additional loans against the properties we have.  We are using cash flow from the first two properties and regular income to invest in the next one.

If we could go back in time and do it over again, I would probably go with getting an owner occupied FHA loan on a 3-4 unit, putting enough down to avoid PMI since that was what we did with our own home purchase.

Just my 2c.

Kelly

Account Closed · Answer

Thanks, @Elizabeth  Colegrove, that is the direction I am leaning, although I don't like the idea of paying PMI. However, my feelings aren't as important as the numbers. ;)  If the math shows that even after PMI, it is still better to put less down in these times of low interest rates, then that is the route I want to go.By the way, I forgot to mention this in the original post, but it might make a difference on how people answer my question:  I am looking for SFR or a duplex under $115K to begin my REI career.

James Wise · Answer

If the money is cheap go with the lower DP.

Kelly N. · Answer

@James Vega - sorry about that, I had forgotten you have to put 20% down to avoid PMI.  I still might consider that, I think you get a better interest rate with an FHA loan.  At least, for our first two properties I was told we were paying .5% above the usual rate since they were investment properties, but maybe that is not industry standard.

For future loans they will look at the payments you have to make yearly (mortgage, taxes, insurance plus any other debt you have) so I still think putting more down now will help in the long run- lower payments mean more cash flow AND lower debt means more borrowing power later on.

Kelly

James Vega · Answer

@Kelly N.

When you said if you could back in time and get an FHA on a multifam 3-4 unit but also put down enough cash to avoid the PMI...why?  Isn't the goal of an FHA loan to put as little down as possible...yes you pay the PMI, but that's the price of the low down payment.  Why go FHA and put more money down?

Thanks for the insight and education.

Elizabeth Colegrove · Answer

I don't mind Pmi because my goal is to have the tenants paying off my houses. My goal is to use my "sweat equity" of dealing with the properties to pay it off

Big or Small down payment?

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