25% Higher Interest Versus 20% and Lower Interest

1 Reply

Hi All,

I am about to pull the trigger on my first 20 unit property. The expenses + T&I equate to 40% of the monthly total rent. My CoC return would be 9.2% which I think seems decent in today's world.

Here's the question:

Option 1: I am debating doing 20% down and 4.5% on the Freddie Mac Small Balance Loan and paying more for the property (1.25 M).

Option 2: Offer less (1.1M) with 25% down and the higher interest rate at 5.5%. 

The CoC return is roughly the same on both deals.

I know this seems counterintuitive, but wouldn't it make sense for me to pay more for the property and use the leverage from the bank and pay more for the property? Or is this logic downright stupid? 

Thank you all in advance!

Here are my thoughts, take it for what it's worth.

I'd pay less every time. Your difference in down payment are almost the same ($275k vs $250k).

If your rate of return is the same, it doesn't make much sense to me in order to save $25k in down payments. That $25k in savings now will cost you $150k if/when you sell.