More money down or lower monthly payment??

Question

I am currently looking at a purchasing a 4 unit Multi-Family to rent out. It has 15 bedrooms and 8 bathrooms and has a rental history of $5600-$5800 a month for all four units.

Say I purchase the property for $500,000, I have two options. 30 year fixed with 25% down or 30 year FHA with 3.5% down

I could put the 25% percent down ($125,000), thus decreasing my monthly payment to about $3,000 a month. I would also have to borrow that $125,000 from a private lender, thus being an extra $1,000 a month to pay him back for another 12 years (125,000 x .20% interest = $145,000. I would pay him $1,000 a month thus ($145,000 / $1,000 / 12 = 12.08 years)

or

Get an FHA loan which only requires 3.5% down which would be all i would have to come up with is about $17,500 for just the down payment. I wouldn't have to get a private lender, however, my monthly payment jumps up to a little over $4,000 ($4,050.00) So now i have lost $1,000 a month in cash flow but I have saved over $100,000 as my initial investment. This option seems like the smarter way, however, i wanted to gather your thoughts and see if anybody could give me some other ides, options, or opinions.

Also, two of the units were built in 1917 and the other 2 were added on in 2000. Do you think the units from 1917 will depreciate? It is too risky to buy something that old?

Jon McCarron · Answer

With the FHA/lower down payment option, you have the ability to eliminate your housing expense, save more of your income, and still have the large reserve of over $100k. Like you stated, you can move out in a year and rent the other unit. You already have your potential next down payment in your $100k reserves for you next FHA/low down payment house hack. I would hands down go for the house hack option.

Side note: my first property was a 25% down payment investment. I regret not house hacking that. Would have been able to grow way quicker.

Bryan Noth · Answer

@Cade Mayer as for cash flow versus cash in, it depends on your goals.  Less money down should allow you to pick up more properties and scale more quickly, but more cash down does add security and better cash flow margin

Aaron K. · Answer

@Cade Mayer the other thing it seems you may not be considering is that if you go with the FHA loan you will have to live in the property.

Percy Matsunaga · Answer

@Cade Mayer

If you do decide to get a FHA loan that will come with extra costs of PMI. This will be difficult to remove unless you refinance and have enough LTV in the property. I think I would go for the Conventional loan with help of private lenders.

Steve Morris · Answer

"In y’all’s opinion, what’s the best way to calculate if the investment is a smart investment? There are so many formulas out there, but which ones do y’all like to use?"

1) Make some reasonable assumptions about income growth and expenses

2) Determine your CFBT (= NOI - debt)

3) Figure your C-C (=CFBT/Down)

If you can do a REAL 5%+ at close (or whenever you start), that's OK and leaves you room for reserves just in case.

Kiera Underwood · Answer

@Cade Mayer I'd do FHA 15 year if possible. You'll have more cash to work with now but also freedom and less interest paid in 15 years.

Cade Mayer · Answer

In y’all’s opinion, what’s the best way to calculate if the investment is a smart investment? There are so many formulas out there, but which ones do y’all like to use?

Bryan Noth · Answer

@Cade Mayer if it was built in 1917, it has been at least strong enough to last 100 years so far.  Decent track record.  Sometimes the fixtures and part used then can fail, that can be expensive in all sincerity

Cade Mayer · Answer

So do you think my return is sufficient enough if I house hack it? It’s say I make $5500 for my rent And my mortgage is $4200.

Is $1300 a month sufficient enough for a property that’s worth $500,000?

Steve Morris · Answer

Well, in general, am an advocate of conserving your cash, so lower down IF:

1) You're making reasonable assumptions about growth in value.  At 3.5% down it doesn't take much of a swing in value to make your equity negative

2) You're making reasonable assumptions about growth in income. If you can borrow $1 at 3% and get a 6% return, why wouldn't you.

In general, if this is your first investment, be conservative while you learn.

More money down or lower monthly payment??

Most Popular Reply