Down Payment advice for a SFH w/ in-law suite

[Sean McDonnell]

My wife and I are in the process of purchasing our first investment property. It is a SFH with a separate in-law suite that we are planning on renting out on Air B&B or to a long term tenant. We are amidst the bidding war now and are close to agreeing on a settlement price.

Using VA loan to finance.

Our question is, is it better to put some money down and build some immediate equity or put no money down and invest that down payment money somewhere else. Our plan is to live in this property for around a year then rent it out and we want the monthly mortgage payments to be as small as possible so the property will cash flow more in the future. Any advice/recommendations are greatly appreciated.

[Jared Viernes]

I'm sorry to hear you are in a bidding war.

If your goal is to purchase the home with the smallest monthly mortgage payments you actually have a third option.  You can pay points in order to lower the interest rate.  Normally, 1 point will be 1% of the overall loan but you would have to talk with your lender; each point should bring down your interest rate by .25%.  Therefore you pay 4% you get 1% less in interest.  This makes your overall loan cost less, but you end up with less equity than if you paid toward the cost of the loan.

Additionally, assuming the seller is not covering any other costs they can fund up to 4% of closing costs (4% is the max they can provide in closing costs by VA limits). That includes points towards lowering your mortgage payment. If they pay towards the points they can actually raise the price the overall selling price WHILE lowering your monthly payment. In this way, it is a win-win situation. Your equity, to begin with, will be much much lower, but your monthly costs will be lower bringing down your risk.

The danger with this is that the property will not appraise for the offered value.

I would discuss this with your lender and your Real Estate Agent if you think it may be an option.  Win-Win situations tend to go over well in competitive offer situations.