20% or 25% down payment on a loan for a rental property.

10 Replies

What makes the most sense for an out-of-state investor looking to eventually acquire multiple properties valued at around 100-125k. Both options are 30-year loans. One is at 4% interest with 20% down or 25% down payment with a 3.25 interest rate?

@Oscar Padilla - This really depends on what you need. If you need the additional cash flow afforded by the lower interest rate (even though it isn't much), then go that route (lower interest rate). If it was me, I'd like to conserve my capital and use the extra $5K+ in another way.

The answer, as it always is, is hidden in the problem...in plain sight.

Here's what you're asking, translated to math:

Property Cost:  $100k
Option A:  20% Down (4%/30yrs)
DP = $20k
Monthly Pmts - $382/m

Option B: 25% Down (3.25%/30yrs)
DP = $25k
Monthly Pmts - $326/m

Difference in DP in Cash (what matters) = $5k
Difference in CF (what also matters) = $56/m
Number of months to recover the difference (Added cost) in DP:  89 months/7.5 years

In other words, you are pre-paying $5k in cash upfront, to get $56/month in extra CF.  Said another way, you would be buying $56/month, for 7.5 years, at a cost of $5k.


  

Originally posted by @Brandon Sturgill :

Nice @Joe Villeneuve. Great logic and presentation...has anyone told you that you would make a great teacher. 

Thanks. I do tach REI, and I used to be a math tutor. Most of what you see comes from my training and doing presentations as an Architect. All that, and going to college, and getting my B.S....in B.S....and I guess I use it all the time. LOL

@Joe Villeneuve

@Oscar Padilla

You could add IRR to make it a bit more interesting based on the following:

Your break even point is 7.5 years (if you had not accounted for the time value of money).

IRR accounts for the time value of money. Let's now assume we are going to look at the extra cash flow pay out of 56 dollars per month in years 8-30 of the loan (672/year) which would give you about an IRR of around 6.9% return on that invested 5K over the 30 years.

Now my IRR math was a little sloppy because of some simplifications .

1. I placed the cash flow in the last half of the seventh year (56 X 8) into year 8.

2. I did not account for the time value of the money IRR) in the first 7.5 years.

3. I also calculated the payouts coming in on an annual basis(56 X 12) and not monthly.

Fuzzy math but still fun I hope!

Originally posted by @Jonathan G. :

@Joe Villeneuve

@Oscar Padilla

You could add IRR to make it a bit more interesting based on the following:

Your break even point is 7.5 years (if you had not accounted for the time value of money).

IRR accounts for the time value of money. Let's now assume we are going to look at the extra cash flow pay out of 56 dollars per month in years 8-30 of the loan (672/year) which would give you about an IRR of around 6.9% return on that invested 5K over the 30 years.

Now my IRR math was a little sloppy because of some simplifications .

1. I placed the cash flow in the last half of the seventh year (56 X 8) into year 8.

2. I did not account for the time value of the money IRR) in the first 7.5 years.

3. I also calculated the payouts coming in on an annual basis(56 X 12) and not monthly.

Fuzzy math but still fun I hope!

 OK.  Sifting through the wees (percentages) tell me what all of this means in what matters....dollars.

I did not account for return of the $5000 so if you completely paid down the loan over 30 years and the 5k came back to you as initially invested equity, your IRR would be about 13.4% which is not a bad return over 30yrs but that's just on the 5k only and not accounting for any other aspects of the investment.

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