Cash on cash return

9 Replies

I am buying a property and when I do the math is shows that I will have a higher return rate on my downpayment if I go FHA vs Conventional even though the conventional terms are better. Do I go with the higher return rate and use the extra money I'm saving in investing into more properties or stick with conventional?

Terms are an often overlooked, and very important, part of financing. Not knowing anything about your situation, I'd suggest you speak with someone familiar with your market and financing.

Something doesnt quite add up here. Can you lay out the 2 scenarios you are talking about.

@Justin Mitchell

....are you saying merely that you're cash on cash return is higher, because you put in a smaller down payment with the FHA?

That's not surprising. The more leverage you use, you'll on paper have higher cash on cash return on the equity invested......higher debt isn't for everyone, but many REI's employ higher leverage. Have you read about BRRRRR ?

@Russell Brazil back ally I'm looking at a 2 unit flat. Even though the payment is slightly higher if I go FHA the difference is I either put 45k down or 15k down. Couple hundred dollar difference per month. Is it better to have the cash to put towards other properties or to have less debt on the 2 unit property.

@Justin Mitchell ,

If you put $15k down, and have a successful rental, aren't you generating 15% cash on cash return (or similar)?

If the APR of the mortgage is around 4.5%, the "extra" $30,000 of down payment in the conventional loan is "earning" you exactly 4.5% yield. I'd ask "why not put all of your $45k to work at 15%, instead of putting so much of it to work at 4.5%.

In good times, you'll create wealth faster using the higher leverage/loan. In other words, try for 3 properties with $15k down each.

Of course, if we hit a recession, the extra debt load may be a problem. Decide how much debt you're comfortable with.

Here is the whole story. I'm selling my home and going to make about 40k at the end of it. I have 15k in addition for the down payment for an FHA loan on the two unit. I have enough to go conventional but only makes about a $200 difference in mortgage. I am living here and renting the other half for a year or two. I was thinking it would be better to have the cash vs the equity in the home to possible flip something or when I get another house or investment property. Is this thinking sound right to you guys?

@Steve K. That's exactly what I was thinking and my current plan. I can get more properties by doing the FHA route and having the cash for other down payments. This is my first deal just wanting to make sure I'm not missing anything. And I should be around 18-20% cash on cash return. Thanks for the feedback!

@Justin Mitchell

Have you searched the forum posts on "house hacking"? That's what you're doing with obtaining an FHA loan to buy the duplex, living in one half and renting the other. You can achieve the same or more with a triplex or quad-plex....with FHA loans available on 1 to 4 unit residences. If you have more down payment, maybe you could go for a quad?

I understand that after living there for one year, you'd be eligible to buy another property with an FHA loan; perhaps you keep the first duplex or quad for a complete rental, and go "hack" another?

@Steve K. That’s the plan. I didn’t want to start out to big. Baby stepping my way into this field that I still have a ton to learn about. The property itself it great. Doesn’t need any huge improvements or anything. I’ll have to plan on a quad next purchase and that will give me more time to even have more money down.