Should I put money down if I don't have to?
Real Estate Broker · Jacksonville FL & Middletown, CT · Member since 2008 · 1k+ posts · 632 votes
I'm currently looking at 3-4 family homes in the 200-300k range to keep as rentals to get some cash flowing in. I have a few lenders who are offering me 100% stated income investment property loans. I can put 5% down, but the payments dont change much. I'm not seeing a compelling reason to put any money down, do you? Lets say I ask for the seller to pay most of my closing costs and they agree. That would allow me to get into cash producing property with next to nothing out of pocket, and I can keep my cash for other things. Any harm in that?
Minna....Generally if you want to make either a no money down deal, or if you want to walk away from the table with cash at close you're generally the type of person is not in a situation to be picky in what you're buying. Like for example say you look at 100 properties. If you had even 10% down to work with chances are strong you could make solid offers on say 50% of those and find sellers willing to carry like 5% or 10% seconds and you'd have a done deal. However, once you start asking sellers to carry like 25% or more second mortgages then you might find like maybe 3 to 5 of those 100 sellers who would be willing to actually do that. That's why you can't be picky in what you're buying. You simply have to make enough offers and someone is bound to bite.
The way you do that is you decide on what you plan to get into. Chances are much stronger that apartment building owners will carry second mortgages as opposed to home owners. Home owners just want their money out and don't want anything to do with seconds. But building owners often are wealthy already and often are okay with holding seconds. So like if it was me I'd go on the mls find 100 buildings that I wanted to make offers on. Then I'd look up the listing agents information online. Find the listing agents fax number and fax them a "letter of intent to purchase". The letter of intent would say that you'll get a 75% first and then a 25% second. That means you'll get the property and you won't have to spend any money as long as the seller agrees to carry a second mortgage. In the case of leaving with cash at close you just get the seller to carry like 30% or more. So say the seller agrees to carry 35%. If they ask why 35%? tell them that you need that extra 10% at close in order to do improvements and reno's to the property. What you really use the money for is completely up to you. So that would be 75% first mortgage + 35% second mortgage = 110%. That means only 100% will be used to close the sale, and you'll get the remaining 10% as cash at the time of closing. Like when the lawyer does the "adjustments" crediting each party for this and that in order to balance the equation, they'll find that there's an additional 10% which will go to you in the form of cash. You should try it.
Rental properties come down mostly to your Cash on Cash Return (CCR). So depending on your investment goals, I would say that putting the least amount down is normally a more productive strategy for building wealth.
I would also recommend setting up a minimum per unit cash flow just to make it worth your time investment also. See if you are only out of pocket $5K, and you end up with a 30% CCR, well that means you made $1,500 a year on the property or roughly $125 a month. Now if that is a single family that's great, but if its a 6 unit building then that's not so great. The work and liability probably isn't worth it.
Now in reference to the bigger picture here, you need to look at and determine your debt strategy and research the advantages and disadvantages of leveraging your money versus paying off debt, which is another discussion in itself. You might want to check out http://forums.biggerpockets.com/viewtopic.php?t=6143 for more discussion on this topic.
Since you seem to be naturally leaning towards the leveraging concepts, I would recommend that you thoroughly research the other side of that to fully understand the benefits of paying down property. It's always good to be fully informed and then make a decision from there. You might want to look through some of AllCash's posts. He is, obviously from his name, an advocate of the no debt strategy. He has some excellent points about the power of paying off debt and some of the advantages of it.
Never put money down if you don't have to. The lower the amount down the higher the returns. And if it's no money down then the returns are infinite. And even better if you can why not even try and get some money out at the time of close. Keep your money, you're bound to need it on a deal where someone may not be willing to carry everything. Or if you want to buy a new corvette.
Minna did you know that when you go looking for a new loan you have to put down all the houses you currently have. Every house you have the creditor only gives you a 60 – 70% Rent to Income. Which means on a mortgage payment of $800 and rent of $1000 the creditor will see that you are cash flowing negatively and that will negatively affect you actually getting the new loan.
There are other ways to get cash flow but land lording wouldn’t be much fun. Getting calls in the middle of the night to come fix something all the damages and repairs you have to deal with and all those months that your property maybe vacant. It’s just a huge headache and one that I don’t want to deal with.
There is another way that not only helps people get into houses and allows for easier qualifying at the end of the term, to buy a house; it allows the resident (renters) to just get a refinance instead of a new loan. It also stops the head aches of “land lording” and allows for a 100% rent to income ratio. This is a really cool way to help all parties involved. Minna you would be getting your cash flow and a 100% rent to income so with every new house you buy you don’t look bad, you actually look better.
If you want to know how, or want to find out my exit strategy, email me and we’ll talk about how we can make this happen.
Travis
[email protected]
Well I'm already a landlord - yes it involves some babysitting your renters, but that comes with the territory and I dont have a problem with that. Also I do realize how banks view rental income - hence "stated income". It costs a little more for the loan but you also don't have to prove income.
r2d246 - how exactly do you get cash back at closing? I know its possible somehow, but for example the lender I generally use has a 2-3% limit on seller pay out towards closing costs. So how do you work out the cash back?
Minna....Generally if you want to make either a no money down deal, or if you want to walk away from the table with cash at close you're generally the type of person is not in a situation to be picky in what you're buying. Like for example say you look at 100 properties. If you had even 10% down to work with chances are strong you could make solid offers on say 50% of those and find sellers willing to carry like 5% or 10% seconds and you'd have a done deal. However, once you start asking sellers to carry like 25% or more second mortgages then you might find like maybe 3 to 5 of those 100 sellers who would be willing to actually do that. That's why you can't be picky in what you're buying. You simply have to make enough offers and someone is bound to bite.
The way you do that is you decide on what you plan to get into. Chances are much stronger that apartment building owners will carry second mortgages as opposed to home owners. Home owners just want their money out and don't want anything to do with seconds. But building owners often are wealthy already and often are okay with holding seconds. So like if it was me I'd go on the mls find 100 buildings that I wanted to make offers on. Then I'd look up the listing agents information online. Find the listing agents fax number and fax them a "letter of intent to purchase". The letter of intent would say that you'll get a 75% first and then a 25% second. That means you'll get the property and you won't have to spend any money as long as the seller agrees to carry a second mortgage. In the case of leaving with cash at close you just get the seller to carry like 30% or more. So say the seller agrees to carry 35%. If they ask why 35%? tell them that you need that extra 10% at close in order to do improvements and reno's to the property. What you really use the money for is completely up to you. So that would be 75% first mortgage + 35% second mortgage = 110%. That means only 100% will be used to close the sale, and you'll get the remaining 10% as cash at the time of closing. Like when the lawyer does the "adjustments" crediting each party for this and that in order to balance the equation, they'll find that there's an additional 10% which will go to you in the form of cash. You should try it.