Theoretically speaking.....max down or minimum down...?

Question

So let's say that you had $500,000 cash to use as a down-payment.....

You want to purchase a $1 mil  multi-family building.... Would you use the $500k to get a 50% down and lower payment? Or split it in half and use $250k to buy 2 similar Apartments, being in at 25% each. The math is one thing, but the strategy is another....

Which one would you choose and why?

Steve Vaughan · Answer

@Bruce Woodruff. 25% down if my only other option is 50% down.

50% to me is the no man's land of equity.  You have a ton into it, basically pre-paying your 'cash-flow', yet not having enough equity to have additional leverage options should rates and terms improve.

My portfolio equity up until I sold most last year was around 50%, but properties were either highly leveraged (70-80%) or had no debt at all.   I then sold my free and clear MFs on contracts.

At 50% leverage,  your options are more limited and you're giving your lender more protection than necessary.

Your rate is the best it can be once you put down 30%.  If there was another tier down in rate for 50%, the numbers would be worth running, but don't put down more than will give you the best terms possible.

An additional option and one I would more consider would be to pay cash for a $600k MF building if a fast close and or condition nets a discount down to $500k.   Season, improve and refi that, bank the equity and do your 30% down on 2 or 3 additionals where the seller can wait 45-60 days to close.

Sam Yin · Answer

@Bruce Woodruff

I second Steve' post.

This is especially true since you are a veteran investor.

For a newer investor with no network and limited experience,  perhaps a hybrid approach,  leaving some cash in reserves.

Bruce Woodruff · Answer

Thanks all! @Steve Vaughan, good solid ideas as usual!

Carlos Ptriawan · Answer

I will buy :

- meets dscr 1.1

- price slightly lower than median price

- as many as possible as long as I have the cash and meets the DTI .

Reed Rickenbach · Answer

I'd do the amount down that allowed it to cashflow, and then use the rest as reserves and for capital improvements. For my most recent 6-unit, I put 15% down ($60k) and held back $100k for capital improvements... but it is a value-add project. If the property you're referencing is 100% turnkey, then it would depend on your individual goals (whether to expedite paying your properties off, or to keep scaling).

Milton Chamberlain · Answer

personally, I believe real estate holds more value in as a wealth-vehicle for long term investing, so I would leverage my cash-on-hand more with the 25/100 equity in two properties VS 50/100 in a larger property.

Obviously lots of variables, but I am still early in my investing career, so I would go the more aggressive route with hopes that time could clean up any mistakes I make :)

Bruce Woodruff · Answer

Strictly running numbers, it appears (roughly) that an investor would gain an additional $700 per month in net income by owning twice as many units. So is that worth the extra stress and hassle? Probably not.....

But a) you get the additional unit's net rental income to add to the total savings, offsetting somewhat the cost of, say, a new roof on one of the buildings . And b) you do get the extra appreciation to add to the mix, so say 5 years down the road, you would have made $42,000 more PLUS the double appreciation.

So if the buildings appreciate at 7% a year, that would be 35% more, so that's $700,000 more + $42,000......

Unless I'm thinking wrong about this....

Theoretically speaking.....max down or minimum down...?

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