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.
You provided the details about the deal and the cost, rent, etc.
In regards to analyzing if it's a good deal, I would like to share this link from BP that really helped me understand in a very clear way how to analyze deals. Enjoy!
Professional Auctioneer · Baltimore, MD · Member since 2015 · 1k+ posts · 1k+ votes
9y
NO! If you are a conventional buyer - I guess YES, but if you don't have it or if you want to be creative about your purchase - there are many ways to do a deal without real cash out of pocket.
If you are negotiating through an agent - that's usually a problem - you can do better talking directly with the seller - face-to-face.
Not picking on real estate agents - I'm a broker and in this business for a long time - but sometimes agents don't have the skills to discuss or counsel with sellers and buyers -
There are solutions to real estate problems - (real estate problem = real estate unsold)
Understanding the real estate (building, lot, commercial non-conforming), theowner(foreclosures, estate, tax sale, down-sizing -)and the existing financing and liens (existing mortages - other liens - other debets - reason for selling) s the best way to work on the problems.
An investors should be able understand the many control offers available depending on the situation -
Sorry business calls me - got to go: can't finish this post - but will be back - meanwhile what creative formulas would you apply to purchase any size real estate without money out of pocket - There should be well over 20 way I know of ....
Investor · Mountain View, CA · Member since 2014 · 120 posts · 51 votes
9y
it all depends on how you finance, traditional banks tend to ask for 25% down - also depends on what you mean by investment properties - single family vs condo vs up to 4 plex vs multifamily vs commercial.
Relationships are key & can save you a lot of money (or kill you).
Professional · Loudonville, OH · Member since 2015 · 125 posts · 37 votes
9y
We have an established relationship with a local portfolio lender and only have to put 15% down, with the balance of the equity being a result of the ARV. So for example, we closed on a property 2 weeks ago that we bought for $45k and the bank is giving us a line of up to $15k to do repairs to the property. Their appraiser did the appraisal based on what he estimates the value will be after our stated repairs are done. So we paid $8k at closing, which was 15% of the purchase price plus closing costs. The property appraised prior to closing at $72k ARV. So we paid about $6k (plus closing costs) toward equity and the bank also has an additional $12k of equity based on our repairs. So the bank is happy because the loan ends of being 75% LTV, but our actual out of pocket was actually much less than that.
I say all this to make the point that once you have an established relationship with a lender, there are lots of options to make deals happen without a lot of cash outlay. We will close this week on another property that we are getting a great deal on, so we are buying into equity. We will be putting only $5k down on this package deal for a SFH, a duplex, and a very nice mobile home. Bank is happy because again ARV came back with lots of equity due to the value of the property relative to the great price we got them for. FInding great deals makes the financing a lot easier if the bank knows you. Good luck!
It is not absolutely necessary to put 20% down. Some investors will buy a mortgage with only 10% down on single family or duplex properties that are non-owner occupied. I have a lender who uses these down payment requirements. I use him for my own deals.
Feel free to PM me and I'll introduce the two of you.
In fact, that goes for any of you on this forum post. It seems that everyone thinks that you need 20 - 25% down for non-owner occupied properties and that's just not always the case. I'm not talking about private lender or hard money loans... I'm talking conventional mortgages here.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
9y
@Gerry Tenebruso you are going to find traditional mortgages, backed by Freddie Mac or Fannie Mae will have LTV requirements of 75-80% for investment properties. The advantage of these mortgages is very low interest rates and long fixed term options. A bank could offer a mortgage not backed by Freddie or Fannie, which may have different requirements. You could also get direct bank financing through a business loan or you may find hard money lenders. These other options may have lower down payment requirements, but likely have shorter terms and higher interest rates. The better option just depends on your long term goals. For me, I prefer a long term low fixed rate and as a result I pay the higher down payment. My strategy is to hold properties long term, so I get the benefit of low interest money for 30 years.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
9y
I stand corrected from my previous post, it looks like you can get away with 15% down on investment property number one as a conventional Freddie or Fannie backed loan. I included links to their requirements below. If your bank has a way around this, it just means they are not Freddie or Fannie backed. That probably means you are paying a higher rate and have a shorter term. That is fine for many people, but if you want a 30 year fixed at lowest possible rate, then you need to play by the underwriting rules of Freddie and Fannie:
Investor · Philadelphia, PA · Member since 2016 · 19 posts · 7 votes
9y
thanks @Joe Splitrock@Kevin Siedlecki@Cary F.@Gisela C. thank you for the sage words. I think we can all learn from your guidance. Hopefully you can continue providing on the post and perhaps offer some guidance on funding strategies.
Also Kevin, I'll be renting out and managing the properties myself so I can expect to see a bit of a higher return on the property. I would love to share my excel sheet so I can get some guidance if my numbers look right.
Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
9y
@Gerry Tenebruso - I agree with self-managing at first, but you should still price it in. Reach out in a pm to send the sheet if you'd like another set of eyes on it!