Why put more money down?

11 Replies

Hello BiggerPockets! I've been studying everything I can find about Real Estate, and I'm finally getting close to saving enough money for a down payment on my first property, so I'm getting more serious about it!

As I've been reading, I've started to wonder - when buying an investment property, is there ever a reason to put more money down than the money lender requires?

For example, if a bank approves me for a loan with 20% down, would there be a situation where I would want to put more than that down? The more money I use in the down payment, the less my cash on cash return will be, and the farther I will be from the down payment for my next property. This seems especially applicable to using an FHA loan to buy a house - if I can just put down 3.5%, is there an advantage to putting down more? (The only one I can think of is that I think there are some kind of monthly fees if you put that little down).

In my mind, it would be better to put as little down as possible and save the rest up as a start on the down payment for your next property. Is that true, or am I missing something?

if a bank approves me for a loan with 20% down, would there be a situation where I would want to put more than that down?

Well, if you're approved, I'm of the school of thought you do as high LTV as you can.

The only reasons why I might put more down:

1) I have enough cash reserves for emergencies already

2) Sleep factor of less debt

3) Recheck your CFBT with/without.  More debt means less CFBT.  So more down is buying you more CF down the road.

@Val Ault

Basically, that is correct. When you have little cash, you pretty much have to use leverage.

This concept has been touched on before. Basically, it all depends on your financial situation and goals. Some people like free and clear properties since it maximizes their cash flow and minimizes risk of expenses to cover during vacancies. That’s a scenario I would like to be in for my retirement, for example.

However, all the “regular” issues arise. For example, what if you put little down, there is another real estate market crash, and you need to sell? Well, now you are under water and can’t sell (assuming you can’t come up with the cash to close).

As I’ve written about before, I had for a ‘consolidation refi’ where I refi’ed three loans into two. Now I had one property free and clear and two properties leveraged to the hilt. My portfolio of properties looked better cash wise, but two looked crappy because they were so heavily leveraged.

I hope this helps. Real estate investment has so many possibilities and potentials, there really isn’t always a “right” answer. It depends so much on your circumstances, goals, emotions (let’s face it, emotions can play a big part of this).

It depends on your access to cash. If you'd prefer to be free and clear sooner, you can put more down, but you may as well over pay your payments if that's your goal. Most people want to keep that cash for, well, anything; beer, fast cars, a new roof, quartz countertops- what I call "real expenses". You use your real everyday money on it. The purchase price is wrapped up in a loan, so your "real expenses" there are the payment, not the total cost. You can always overpay the loan, reducing the 30 years and total interest paid significantly.

Would I pay more down payment than I had to? No. Mortgage rates are crazy low. I'd use that money for something else.

I read somewhere, so I may not have this correct, But when you put down 21% or more down, you get breaks in premiums and interest rates.  If so how much difference could that be with todays cheap money?

Someday interest rates will jump up, so maybe then??

Interest rates and lower fees like PMI. If you plan to invest long term in the property, these make a difference. More down helps over the life of the loan.

You guys make some good points - if I planned to invest in the property for a long time, it might make sense to go for the lower interest.

And David, we’ll said - I guess it depends on your goal. My goal is early financial freedom, so I’m looking for fastest growth, and it seems like that would almost always be highest if I put as little down as possible so that I can start a fund for my next property.

@Val Ault

Exactly... just as some of the books said... grow your portfolio with max leverage. Then, in 30 years you'll have many properties fully paid off and lots of equity. If you didn't leverage. You'd have a few properties giving you lots of cash flow, but not on the same scale as if you leveraged and waited it out. Leverage in real estate investing is like compound interest in a savings account.

I’m glad you’ve got it! Stay safe, and good luck with your investing.

@Val Ault you can get better interest rates by putting more down. The more you put down, the more skin you have in the game, which makes it a safer bet for lenders. If you put 20-25% down on a non owner occupied multi, then you can avoid PMI. However for FHA, you will have mortgage insurance for the life of the loan, no matter how much you put down. Additionally, the more you put down, the smaller your loan amount is, which will lessen you debt to income ratio when qualifying for a mortgage. A lower debt to income ratio usually gets you better rates.

I think it depends on your financial situation and goals.  First, never buy a bad deal.  If you are talking about 20% down and you think you need to go higher on the down payment just to get a positive cash flow, that's almost never a good idea (or a good deal).  That being said, if your financial situation says that cash is hard to come by, and the cash flow is decent at 20% down, I wouldn't put any additional down.  An assumption I'm making here is that you're investing for cash flow.  If your goal is to own properties outright, my response might be different.  If the cash on cash return is decent, I'd say go with the 20%.  That means it will be sooner you can find the cash to get your next property.

The caveat here is that if you can recoup the extra money down because the interest rate is MUCH lower (like 12-24 months), it might be worthwhile to go higher, but that's rarely the case.  At least it never has been with me thus far. An extra 10% down to get a quarter-point lower interest doesn't make much sense if cash flow and building your portfolio as fast as possible is the goal.