How to afford monthly payment for low to no money down financing?

Question

Hey, another newbie starting out in Utah! I've read a bunch and listened to countless podcasts, but I'm stuck in the analysis paralysis mode. I want to pull the trigger on a SF, but only have enough for 5-3.5% down which makes monthly payments just out of my budget. Is there something I'm missing? How do investors afford low to no money down, but can somehow make the high monthly payment work? Is there a financing option that requires no monthly payments? Or do I just need to wait to get a bigger down payment? Thanks!!

Joe Villeneuve · Answer

You buy properties with better numbers.  When you analyze you start with the rent, then subtract your minimum CF (always pay yourself first), then the rest of the expenses (except the loan pmt).  This equals your maximum loan pmt.  DON'T GO OVER IT FOR ANY REASON.

Now calculate what your max offer is based on the terms you get from the lending source you're working with.  Remember, you can't go over that monthly pmt, so that will impact your max. offer.

Amber Martin · Answer

@Collin Corrinton not really, just trying to think of absolute worst case scenario. Where would be a good source to find the vacancy rates? Or is it best to just do a standard 5%?

Collin Corrington · Answer

It sounds like you just need more in reserves or a bigger down payment.

Don't' try and fight with your back against a wall.  You're right, one hiccup and you'll be scared of doing any more deals.

Have you analyzed vacancy rates though?  6 months is a long time to be vacant.  Not unheard of, but if that is the norm in that area then you need to find a new area.

Collin Corrington · Answer

@Amber Martin

I’d start by checking the MLS and see how long rentals have been on the market.

Amber Martin · Answer

@Paul Wachtler I am currently finishing his The book on Rental Property Investing! I am planning on reading that one next.

Derek Harris · Answer

Amber, some deals can cash flow with no money down and some require 20% for them to cash flow. It appears you found one that is the latter. Me personally, it's all about the cash on cash return. Would this deal still make sense if you put down 20%; what would the cash on cash return be for it? For me, if it's not at least in the double digits, then it's a no-go.

Keep in mind that although you may be able to get 0% down (i.e. VA loan or seller financing), you will still need money for closing costs, and I strongly recommend having enough reserves set aside. My suggestion is to continue saving money.

Brian Boyd · Answer

Typically, the low or no money down option is when there is Owner financing or you have other investors so that "you" have no money down, but there is money actually put down on the property.

Corby Goade · Answer

You're not missing anything. There's inherent risk all investment and there's an inverse relationship between cash flow and CoC. You can't have it all, you have to decide where you can live with an acceptable level of risk and either jump in or not. You can do it! Your future self will be forever grateful.

Blake Garcia · Answer

Low / No down payment or 100% financing sounds sexy! I've done it! It's excellent for getting into a new deal or stepping up. It's advantage is you are into a new project way faster than saving up for traditional 80% financing.

The downside is that you are now borrowing 20% more so your payment is 20% higher and cashflow will decrease because of it. It wont perform like an 80% leverage property because it isn't. If you are expecting to cashflow improvements or other major expenses it has to be taken into account.

Yes there are owner carrybacks and balloons, but even with the expectation of a refi down the road you still have to increase the equity to 20% just to break even and get out of it. Banks know their exposure and generally lend according to it. That's why they lend at 70-80%. Just be careful of the risk that you may not be able to renew if it cant appraise and you owe a balloon.

The more you put down the better your cashflow will be.

Joe Villeneuve · Answer

What you just described is a mistake many REI make when the Hack.  To do it right, you can't rationalize negative cash flow (yes, if you are covering any of the other tenant's rent, then it is a negative CF) by saying you are living upstairs for less (or free).  The correct way to HH is to have the other tenant(s) cover your would be rent.  If you don't, then you're just inviting trouble.  HH not done this way, means you are just a vacancy away from having to cover two rents, and living only in one.

How to afford monthly payment for low to no money down financing?

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