Higher Down Payment or Buy more Real Estate?

[Jonathan Shnoravorian]

Would you rather use extra capital to put a higher down payment (30%-40%) to produce more cash flow each month on one or two properties, or put less (15%-20%) and buy four to six properties?

[Joe Villeneuve]

That extra cash flow you think you are getting, you are paying for upfront.  It's an illusion.  Your cost, your only cost, is the cash that comes out of your pocket.  This applies to every deal you make.  So, the higher the DP, the more that property costs you.  Keep in mind, the source of the funds to pay the mortgage comes from the tenant (rent), so that isn't a cost to you.

Also, the more the property costs you, the longer it takes you to recover that cash, and you don't start making a profit until you do.  Your buying power, at a typical 20% down, is 1 to 5.  That means for every dollar you spend (cash), you get 5 times that in property value.  If you put 25% down, you would get a 1 to 4 cost to PV.  If you put down 50% you would get a 1 to 2 cost to PV, and so on.  Why is this important?  If you had $100k, and had a choice of putting 20% down on a $100k property, and get a cash flow of $5k, or 100% down and get a CF of $10k/year, which would you do?

  .                            20%             50%
Property Value       $100k        $100k
DPayment             $20k          $100k
Cash Flow              $5k/y       $10k/y
Yrs to profit            4               10
If both had $100k to start... 
.                            20%             50%
Property Value     $100k           $100k
DPayment             $20k           $100k
# of properties        5                 1
Total PV               $500k          $100k
Total CF              $25k/y         $10k/y
Yrs to profit           4                  10