Real Estate Investor · Beaufort, SC · Member since 2014 · 29 posts · 7 votes
My goal is to buy 10 cash flowing rental properties as quickly and safely as possible. So far I have 4 and I keep 6 months of mortgage payments on hand and have a decent security net in place for maintenance etc. I know that leveraging a property with as little money down as possible would allow me to buy more properties much faster. However, I've noticed that I end up going the safer route by putting 20% down so that there is plenty of cash flow and therefore a little less risk. Also, I don't like to pay PMI but if the numbers make sense with only paying 10% does it make sense to pay it and take a little less cash flow? I know the numbers speak for themselves, but your opinions are appreciated!! Thanks!
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
11y
This is a new flavor of the same leverage debate that has been had in BP at least 100 times. You're not going to get a solid answer to your question because the answer is that it depends. On what you ask? On a ton of things:
1. Your overall asset allocation
2. Your propensity for risk
3. Your personal situation. Do you have kids? Are you saving for retirement? Etc.
4. How you generate outside income
5. Your time horizon
6. Your capacity to raise outside capital from lenders, non-traditional lenders, partners, passive equity investors, etc.
7. The size of your balance sheet
8. Your credit worthiness
9. Your skill level with real estate
10. Your deal flow
I could go on and on and on. Leverage is like driving a fast car. You can get where you want to go much faster by driving the fast car faster, but you can also crash and burn in a ball of flames. Whether or not you have the skill to drive the dragster at 300mph depends on how good you are at driving.
More leverage is more risk. A higher overall leverage ratio will siphon cash flow in favor of debt service, but it will increase your ROE if you are good at investing. Making your dollars work harder is more important when you have fewer of them. As you get more of them you'll likely care more about making more dollars each month than making them work hard. This is a tradeoff that nobody can answer for you without having answers to at least the questions asked above if not more questions.
In general I think people should leverage more earlier in their investing career and decrease their leverage ratio as they age. When is this advice not sound? Probably pretty frequently. The reason is that it depends on so many factors that it is impossible to generalize. However, people generally have a shorter time horizon as they age and thus less tolerance for risk. Overall this is probably one of the dominant factors in deciding what is right for your personal situation.
Real Estate Broker · Mount Olive, IL · Member since 2013 · 1k+ posts · 310 votes
11y
Welcome to BP.
Your strategy of having 6 month reserves, NOT paying PMI and 20% down seem to be very good. I have run into situations where i had to borrow from credit card and pay like 18% - 22% interest rate and believe me it's not fun.
Your opening statement to BP speaks volumes. "My goal is to buy 10 cash flowing rental properties as quickly and safely as possible." Quickly and safely are almost polar opposites. It almost but not quite is one or the other. I think if what you have been doing is working and you can get to ten within a period you call reasonable then keep doing what you've been doing.
Real Estate Investor · Beaufort, SC · Member since 2014 · 29 posts · 7 votes
11y
Thanks James,
Good point Cal C. I would like to achieve the 10 property goal quickly before interest rates and property values rise and make it even more challenging for me to invest. I'd like to do this while creating and maintaining multiple "safety nets" to avoid failure as much as possible.
Joe- "Safe" for me is creating more favorable odds for successful and sustainable growth. For example , having sufficient cash flow and reserves to maintain the properties to high standards. Having low PITI relative to average rental rates incase rental rates were to decline or expenses increase.
The difference in cash flow between putting 10% and 20% can be significant IMO. Roughly eating up10% of my rent in past calculations. With only 10% down I get tagged with a higher interest rate, flush PMI down the toilet and have a higher loan amount overall. But ...paying an extra 12k for a 120k property is the trade off. Slow and steady by putting 20 down is probably a better bet for me at this point.
Real Estate Investor · Beaufort, SC · Member since 2014 · 29 posts · 7 votes
11y
So on a 122k property
10% is 12k down and mort $820
20% is 24k down and mort $691
$129 difference , rent average $1200
I Subtract 10% management and 10% maintenance from rent off the top leaving overall cash flow for ...
10% down = $140
(7.14 years to recover $ down)
20% down = $269
(7.43 years to recover $ down)
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
11y
So, as I see it, if you take $12,000 more away from your use (20% down), you get only $129/month back. Another way of looking at it is this.
Comparing apples to apples, the 20% down makes you $12,000 in the hole more than 10% down. Every month you are only $129 less behind in usable funds. I bet you can do more with that extra $12,000 you're giving to your property than you can do with the extra $129/month ($1548 after year one) that you would get back.
Keep the extra $12,000 and invest it in your next house.
You didn't answer the most important question though. How long will it take you to accumulate enough cash to move onto the next house?
Real Estate Investor · Beaufort, SC · Member since 2014 · 29 posts · 7 votes
11y
True Chan K. I was living in the properties and meeting minimum requirement respectively . And good point because I wouldn't be doing that at this point so if need to do 20% down anyway!
Real Estate Investor · Beaufort, SC · Member since 2014 · 29 posts · 7 votes
11y
I agree joe but a good point was just made about other than owner occupied mortgage requires 20% down , unless you have experienced otherwise ? And to answer that question I have adjusted my budget to acquire a 20% down payment twice a year but they would need to be turn key.
Investor · Tampa, FL · Member since 2014 · 104 posts · 32 votes
11y
@Steve S. mention, how fast can you acquire the purchasing funds. if it is like 2 months, then you can purchase 6 more houses before the year turns over. I don't think the prices are going to change that quickly, I could be wrong though. So then you would be ok at purchasing them each at 20%. Also factoring safe, 20% is the way to go. You don't want to over extend yourself on minimally financed houses, then you will be stuck with a much higher burden if things go sour. Just my one cent on the matter.
I agree joe but a good point was just made about other than owner occupied mortgage requires 20% down , unless you have experienced otherwise ? And to answer that question I have adjusted my budget to acquire a 20% down payment twice a year but they would need to be turn key.
That is correct. I was going under the assumption you had a source for both. I kind of do, but only for refinancing.
Real Estate Investor · Beaufort, SC · Member since 2014 · 29 posts · 7 votes
11y
Joe- I've started to reach out to different creative financing options so I'll look into that
Jaime- that makes sense , someday I'll get to that point but for now I'm planning on 1 and pushing toward 2 properties a year
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
11y
Here's my take on it. The less I have in the property, the less I have at risk, and the more I have in my control to move forward with...as in getting that next house.
You would start out $12,000 behind by putting 20% down. Based on that added $129/month ($1548/year), it will take you 7 years, 9 months and a couple of days to "catch up". Keep the extra $12,000 and have it work for you...not sit around with it's feet up in your property.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
11y
Here's another way to look at it.
$24,000 = 20% down on 1 property w/ Cash Flow = $269/month; Total CF = $269/month
$24,000 = 10% down on 2 properties w/CF = $140/month/property; Total CF = $280/mo &...you would be adding 2 appreciating properties to your portfolio instead of just 1.
Real Estate Investor · Beaufort, SC · Member since 2014 · 29 posts · 7 votes
11y
Joe- that's what my gut tells me to do also. It's just 12k equity at risk of lawsuits or lost in market depreciation . 20% down is really the safest bet for the banks , if they had to take back the property that is.
Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
11y
Steve,
There is one more thing that nobody mentioned so far. You're buying $122K house for $122K. That is a wrong approach. You need to find a $70K house in a $122K neighborhood, rehab it for another $30K, and then refinance at 75% LTV of $122K or $90K. In that case you only put $10K into the house but you have $32K equity in it. If your rehab happens to be at $20K you effectively would have done a no money down deal.
For this to work you need to have cash available for the entire operation of use a hard money or private loan.
I'm in the same boat you are. I'm also active duty military too. Closing on my fourth property now, and already looking for number 5. Only my first was owner occupied though, so I've had to put 20% down using conventional financing and even 25% for the latest property because it's a duplex. Now that I've hit four, the mandatory down payment actually jumps to 25% even if the next one is another SFR. So I'm beginning to look at creative financing options to either finance portions of my down payments, or finding a portfolio lender that will be okay with a higher LTV. Let us know what you end up doing!
Rental Property Investor · NC · Member since 2014 · 132 posts · 40 votes
11y
@Joe Villeneuve I really like the way you think about REI. Originally, I wanted to do have a lot of equity in my investment properties to be safe, but in a long term, your approach makes sense. Buying property with little money down for long term, then refinance it ASAP to have fund for next property. I like that!
Real Estate Investor · Beaufort, SC · Member since 2014 · 29 posts · 7 votes
11y
Nick B - I sat up last night contemplating that scenario after you brought it up. A great piece of valuable information! Luckily I did buy the house for 122k and it was a HUD Property, did a rehab and the house is looking great. I did a CMA and I think it may appraise around 155k-160k. Does this make sense in this scenario?
122k Purchase Price
24k down payment + 10k rehab and other expenses = total in property was 33k
New Appraisal 160k x .75 = 120k New Mortgage
120k – 97k Current Mortgage = 23k cash out
Looks like it would take about $180 from my cash flow but would still operate effectively. But what about closing costs for the new loan?