Explain: "Leaving some equity"

[Account Closed]

Can you explain to me why it is important to leave some equity in a property in case of an economic downturn? I have read this in a few posts and I can't figure out why. Thanks.

[Andrew Johnson]

Rick Santucci A couple of reasons:
1.) Since your mortgage is lower you can stomach a rent decrease and still have a better shot at staying cash-flow positive.
2.) You retain the *option* to sell in a downturn. If you have 10% equity and the market drops 20% then you're upside down. It's cash out-of-pocket to sell. So you could end up with 3 choices: a.) walk-away and kill your credit for 7 years, b.) lose a little each month in negative cash-flow (as rents likely declined), c.) pay the bank the additional loan balance at closing.
3.) In rare cases, you have had banks call-in loans because you're upside down in a declining market. In common practice, commerical properties have a 5 to 7 year fixed rate with a balloon. Good luck paying the balloon by refinancing if you have very low equity. Especially since, in a declining market, you have more strictness in loan committees and underwriting.
Now if everything is all roses and bubblegum and appreciation goes like clockwork, you'll always be okay. Why? Your equity base is growing with appreciation and mortgage principal payments. By markets do stagnate and correct (let's leave "crash" out of it).
Equity left in the property gets no return but you also get barely any return from your cash-reserves in a money-market account. Both can be some risk hedge against future uncertainty.