2 Properties - How much down on each?

Question

I will be purchasing two properties - one for approximately $20K and the other for $35K. Both have renters in them, one paying $740 per month ($20K property) and the other $850 per month ($35K property). I will be putting down approximately $20K total to reduce the mortgages and hopefully have them both paid off in 2-3 years. My question is, do I put $10K down on each OR purchase the $20K home outright, put a minimal amount down on the $35K home, and use the cash flow from both to pay down the $35K home.

Thanks!

Jason Thomas · Answer

Thomas S. That is the way I am leaning after sleeping on it.  If I have 20K to spend, I can use that for down payments on multiple properties to generate more cash flow instead of paying off one house and not being able to capitalize on possible future opportunities.

Thomas S. · Answer

Remember having equity lying dead in a property is not free. Whether you are 100% financed or purchase outright the cash flow from a property is the same. Money must earn it's keep as does the property. You pay a return on the equity off the top of the income, as with a mortgage, before you calculate the actual cash flow the property generates.

Your equity should be earning a minimum 5% return off the top but I prefer 20% which is why I never leave equity dead and buried in a income property.

Michael Totman · Answer

The answer to this question, how much down on each, is: whatever it takes.  I envy your position.  The total purchase price of your combined properties would be less than what I'd need to put down on a regular loan for a rental here and it comes with rents above $700 too?  Keep in mind your expenses, are both of these houses profitable even at that price? If so it's really simple math, your profits are a function of your collected rent and expenses including your debt.  Run the amortization schedules for both properties at various down payments and then throw in the additional cash flow you'd have available to pay down the notes. With such small numbers it won't be much of a difference. Personally I'd prefer to own the one outright if I could, then in less than 3 years you'll own both outright with, hopefully, still over 55k in equity plus $1,500/month gross cash flow.  You'll have tripled your investment in less time than it took to finish high school.  Not bad.

Thomas S. · Answer

I would put the minimum amount required on each and not bury my cash in a property with a return at such a low rate. Why invest it in your property at 3% when you can spread it over multiple properties at minimum down with a return of 15%, 20%, 30% or more.

Mortgage interest rates are so low they are practically free. When you put cash in a property you are only investing it at the interest rate you are saving. That is a extremely poor rate of return on cash and should not be done by wise investors. Invest your cash somewhere else, anywhere else, at a better return.

Rich Vogel · Answer

@Jason Thomas have you set up financing for these properties yet.  I know by me they won't touch loans that low.  But if you haven't looked into it you might want to start working on finding a lender.

Jody Davis · Answer

@Jason Thomas I would buy one home outright for $20K, as you will have fully maximized your cashflow in that particular property and use the paid off home to help pay down mortgage for the $35K house.  You will have the $35K house paid off in no time and will be able to use the equity to do some creative investing in the future.

Susan Maneck · Answer

Personally I would put down at least as much as needed to avoid PMI. That is really hard to get off your mortgage once it is on no matter how quickly your paying it off.

David Veikune · Answer

Do whatever you feel comfortable with at the end of the day Jason. Sounds like you have a few different ways to go. Some investors feel like putting the minimum while others want to get them paid off immediately. It's all about your risk tolerance and what makes you sleep better. If you don't care play with all the numbers using the bp calculator to see which way will save you the most money. That's what I would and I like the prices in Mississippi! Good luck