Investor · Philadelphia, PA · Member since 2016 · 19 posts · 7 votes
Hi all,
Is it absolutely necessary to put 20% down on a investment property? I'm trying to buy a duplex in the suburbs of Philadelphia and was told I have to put 20% down
Thank you,
Gerry
Many people have written and made valid points. To these I add my own comments which come from my unique vantage point: I am a CPA in Cherry Hill NJ, and over the past 12 years, my wife and I purchased, own and operate a series of residential and commercial units in 2 counties in NJ, and until recently, in Texas, too.
Properties with little or no money down are great to get in the door, but there are instant snags, the biggest one is the rent. Rent drives cash flow. From the rent you will pay your PITI (princ, int, taxes, and insurance), and other secondary expenses. Whats left is supposed to be to service your debt and also put something in your pocket as profit - the reward you get for taking a risk.
So its easy to work the numbers and see what you need, and you can determine your own profit in the process. The snag is that the more financing, the more rent you;re going to need to service your debt. Be careful you don't price yourself out of the neighbor hood. Remember that real estate is local, and rents change state to state, town to town, street to street and block to block.
If you leverage (pull debt to buy) yourself too much, you could have a hard time getting a tenant, and then you have to come out of pocket. There are two very very well known situations in NJ in the last couple years, where investors were over leveraged, and I mean WAY more than one property, and fraud was committed to the tune of seven figures in each case. It became a robbing-peter-to-pay-paul situation that spiraled out of control. Are you headed down that path? I VERY seriously doubt it, but my point is to go into this thing with your eyes WIDE open.
I will also say that the less you finance, the less interest you'll pay, and you'd be surprised what a diff it can make - frequently 5, sometime 6 figures over the course of owning the property. The less interest you pay, the more equity you have.
Also, more of a down payment will reflect favorably in your interest rate (and you pay less interest.
Also, we always evaluate paying a fraction of a point to see if the interest savings are worth it. With lower interest comes a lower rent needed (or higher profit margin if you don't have to lower it). We once paid a quarter of a point, which lowered the rate. The interest we saved was more than the quarter point, so it saved us even more money, and after all, its not how much you make - its how much you keep! Anyway, thats my two cents.
@Gerry Tenebruso. You're lucky! If you're not living there, most banks will make you put 25% down. Curious to see what others have to say, but in my experience, 25% down on anything you're not going to live in. You can get a kickback of up to 2% for closing costs from the seller, but the bank doesn't want an LTV over 75%, and V is purchase price on a purchase loan.
Burbs or no burbs you are looking at 75% LTV purchase on investment properties unless you already have a already established relationship with a portfolio lender. Also, since this might be your first investment purchase? Lenders will want to see more skin in the game on the down payment.
As said, banks will expect 20-25% typically for investment properties. However each lender is different and you may find someone with different terms. A hard money lender may take less down on the right deal but will want a much higher interest rate and points.
One option is to get more creative; partners, private lenders, pulling cash from other investments, home equity loans etc.
@@Brandon Turner has a book on buying with no or little money down. Look under the education tab above.
I was quoted 20% down from our lender as well when we wanted to buy a duplex this past summer. After a few weeks he came bask and said... "well actually its 25%for a 2 unit" Thankfully we had the capitol available and it was a killer deal. But sometimes these bankers can mix it this stuff if they are used to just doing owner occupied loans all the time.
Thanks everyone for the information. Some of the specifics on the deal.
$175,000 purchase price, 2units, 20% down
$5,500 sellers assist
Net price of $169,500
Average estimated monthly rent role of $2000
$2600 taxes
$1400 in insurance
Tenants pay all utilities
I got quoted at 4.875% rate with $2k back at closing with 20% down.
Just trying to vet if this is a good deal per everyone's experience. I'm new to the game and need some guidance mentoring.
I'm classically trained in corporate finance so I can learn valuations quickly with some guidance.
The ARV is probably $200K with a bit of work (maybe $10k).
You may want to reach out to Angel Oak Capital who has some investor programs. I know the guy who started this and they have grown like crazy - i believe they have a lot of wall street equity backing them. They may lend off the FMV of the property with nothing down as long as you are under their percentage of FMV. I have not worked with them yet though.
Andrew Moore thanks for the tip. What's your connection to the founder? Any reason why you haven't utilized their services yet? I have a multi unit I have my eyes on but want to find creative ways of financing.
Gerry - in 2006 when I got out of college and starting doing tax returns the firm I was at did his tax work and I got to know him and kept in touch over the years - at the time he had the largest mortgage origination business in the southeast with something like 600 employees. He formed Angel Oak Capital after 2008 and I have seen it grow like crazy. Call the guys over there at www.angeloakprimebridge.com and they will get you on track. I am just getting started in investing after doing 2 flips in 2005 years ago so havent used them yet. let me know if they have a good program, appears they do. My full time gig is as a cpa doing taxes for developers, investors, landlords and other high income high net worth clients. I havd been on the compliance side of many deals for clients - time to get on the other side
Damir Kamber the duplex will be about 20 mins from home and I'll be managing it personally. I'll be putting 20% down unless I can find creative financing. The other stats are listed in my prior post.
I was able to do 15% down each on my first two properties. Both purchased in the last 11 months. I used mortgage brokers both times - both guys I've known for years and have been in the industry for a while. Are you just going to your bank or are you using a broker?
I put down 20% on my first investment condo. I used Wells Fargo and didn't have to get ``creative``. Shop around before you commit to any lender. Good luck.
@Gerry Tenebruso 20% is probably the minimum you'll have to put down. Does your lender know you won't be occupying the property? That very well could change things. I'm trying to purchase a 2-family that I want to live in and need 20% as an owner occupant, in Providence, RI. It's contingent upon myself moving in within 30 days of closing. Otherwise I'm looking at an investment loan. There are 2 leases in place so I can't occupy within 30 days of closing. I've done deals with him previously and trust m 100%.
Many people have written and made valid points. To these I add my own comments which come from my unique vantage point: I am a CPA in Cherry Hill NJ, and over the past 12 years, my wife and I purchased, own and operate a series of residential and commercial units in 2 counties in NJ, and until recently, in Texas, too.
Properties with little or no money down are great to get in the door, but there are instant snags, the biggest one is the rent. Rent drives cash flow. From the rent you will pay your PITI (princ, int, taxes, and insurance), and other secondary expenses. Whats left is supposed to be to service your debt and also put something in your pocket as profit - the reward you get for taking a risk.
So its easy to work the numbers and see what you need, and you can determine your own profit in the process. The snag is that the more financing, the more rent you;re going to need to service your debt. Be careful you don't price yourself out of the neighbor hood. Remember that real estate is local, and rents change state to state, town to town, street to street and block to block.
If you leverage (pull debt to buy) yourself too much, you could have a hard time getting a tenant, and then you have to come out of pocket. There are two very very well known situations in NJ in the last couple years, where investors were over leveraged, and I mean WAY more than one property, and fraud was committed to the tune of seven figures in each case. It became a robbing-peter-to-pay-paul situation that spiraled out of control. Are you headed down that path? I VERY seriously doubt it, but my point is to go into this thing with your eyes WIDE open.
I will also say that the less you finance, the less interest you'll pay, and you'd be surprised what a diff it can make - frequently 5, sometime 6 figures over the course of owning the property. The less interest you pay, the more equity you have.
Also, more of a down payment will reflect favorably in your interest rate (and you pay less interest.
Also, we always evaluate paying a fraction of a point to see if the interest savings are worth it. With lower interest comes a lower rent needed (or higher profit margin if you don't have to lower it). We once paid a quarter of a point, which lowered the rate. The interest we saved was more than the quarter point, so it saved us even more money, and after all, its not how much you make - its how much you keep! Anyway, thats my two cents.
As many have suggested on here, I took a little bit of time each day over the course of a week and called twelve banks in my area. The twelfth bank was a local portfolio lender that only requires 15% down for commercial loans. I suggest you start calling around. Might be surprised at what you find!
"I got quoted at 4.875% rate with $2k back at closing with 20% down."
Gerry,
As someone stated, you might find a lower down payment, but you'll likely end up giving it right back again (or worse) in the form of higher interest, or some other undesirable terms. I would only do this if you are really strapped for making the down payment, i.e. there is no other way to do it.
That said, at 20% down, the 4.875% interest sounds a little high. Personally I would try to get that rate as low as possible. In the grand scheme, you will increase your net worth faster, if you make the down payment, and get the best interest rate you can. A better interest rate will also improve your cash flow.
When you talk about being creative, don't forget about the end goal, to increase your net worth as quickly as possible. Think about the big picture and where you want to be (how wealthy) in 10 years. Do the long term math. Make sure the deal gets you there. In other words, Is it a good deal for you, or are you just finding good deals for the bank?
My local banker requires 15% down and can be used towards the rehab process. It's pretty phenomenal but our first two were bought with 25% traditional financing.
Rex Ashbaugh thanks for the notes. I did have an opportunity for 3.5% but with $13k in points. To me cash is king and I rather keep funds for future deals and have renters pay down the principal. Also in PA here is no prepayment penalty so a portion of the free cash flow that I'm estimating to be approx. $800 a month will go to paying down the balance. Is that s good strategy?
When you pay down principle with extra cash flow, you are only getting a ~4% return (the loan rate) on that money.
You could get a better return putting that money to work elsewhere. You did say cash is king, so why would you give that money to the bank for a low return? I would only do this if you are uncomfortable with the amount of leverage. But the deal you described already has plenty of cushion.. 20% down plus a discounted price, so. First you don't want to make a down payment, but then right away you want to pay down principle? Those 2 thoughts are contradictory..
Also, diversification is important. Some deals may not turn out as expected, so you want to spread out your investments to ameliorate the risk. Take the money returns from the first deal, and use it to finance the next, and get a good return on that money each time. Take your profits and keep that money working for you at the best rate of return you can find. Again, do the long term math. Setting goals is really important. Long term compounding matters.
In terms of the interest rate, be as exhaustive in your search as you can be, to get the best rate. If you are not getting a great rate, try to understand why. Understand that there are different types of lenders, and what it means in terms of what they can offer you. Are you talking to the right lenders? Make sure that you are. This is an area where being creative and knowledgeable can really benefit you.
@Gerry Tenebruso - I agree that 4.875 is not a bad rate for an investment loan right now.
As for paying down the mortgage early, you will see a lot of debate about that here. If your goal is to grow, then keep your cash so you can invest it in the next deal. If your goal is to pay off this single property as soon as possible to enjoy the cash flow with lower expenses, and you don't want any more than this one, then pay it off early. Personally, I would not do that until I am much further into my career, when I know I have met my goals for growth and long-term passive income - and maybe not even then.
As for this actual deal, let's break it down by year:
Rent: $24,000
Taxes: $2,600
Insurance: $1,400
P+I: $7,200 (assuming 30-year amort on $127,125 loan
Add some conservative estimates for the stuff you didn't mention:
Management (10%): $2,400
Maintenance (10%): $2,400
CapEx (15%): $3,600
Vacancy (10%): $2,400
You're left with, hopefully on the low end since we used conservative estimates: $2,000/year. Your downpayment is $40k after you get 2k back, so your COC ROI is 5%. That's not great. If we use more optimistic estimates: 8% management, 5% maintenance, 10% cap ex, and 5% vacancy, your end of year total is a lot better: about $6,000. Now you're at 15% COC ROI.
So that's the range you should expect on this deal, 5-15% ROI, for $2,000-6,000 per year. I'd like my low end to be a little higher, but on the high end you've got a fine deal here.
I was able to use the equity in my home ($50,000) to purchase my single family rentals.
I currently have a portfolio of 6 homes with loans totaling $278,000 that I have aquired over 2.5 years. I put absolutely no money into any of the deals and also rolled closing costs into the loan as well. All of my properties cash flow very well and it seems to be working. I used a local small bank that I have my own home loan with.
My current deal is 4.5% over 5 years with 20 year amortization with the loan rolling over to a new rate every 5 years but I pay every two weeks so they will each pay off in about 17 years without an additional payments. I anticipate the new loan increasing at max to 6% and have factored that in.
I feel very comfortable with my banker and because they are small and local they work with me. I would look into this as an option as well.