higher down-payment equals to more cash but lower CoCROI
Singapore · Member since 2019 · 78 posts · 9 votes
May I know why higher down-payment equals to more cash but lower CoCROI? Thanks!
Look at it this way. I pay 100K cash for a property. My cash flow after expenses is $1000 a month. That's $12,000/ year. That's a 12% return annually. It will take 8.3 years to receive all of your money back. The other option is 20% down and a bank loan on the rest. In this scenario you put $20,000 down and say your mortgage payment is $500/month. Cash flow is now $500 instead of a $1000, but your CoC return is now 30% annually. It will take 3.3 years to get your cash out and your tenant is paying for the cash flow and your return on your money. Your CoC is infinite after 3.3 years. @Joe Villeneuve is correct. Use as little cash as necessary.
Good Luck.
as in if I pay for the property full in cash, my CoCROI is much lower as compared to taking a bank loan. However, my total equity is much higher. Hence, does it mean that the lower the CoCROI, the better? Thanks!
You don't make a profit until you recover all the cash you put in. So a higher DP bringing more cash flow is an illusion. It will take you longer to recover your initial cash input.
Also, you are not really gaining anything by buying equity. That "bought" equity is equal to the cash you used to buy it. It's the same money. The difference is it was free to use as cash...but when you take a loan out to get it back out of the property, it now costs you money.
You're much better off paying as little out of pocket as possible, and keep your cash as liquid, and in your control, as possible. The actual returns will/should be much higher.
You don't make a profit until you recover all the cash you put in. So a higher DP bringing more cash flow is an illusion. It will take you longer to recover your initial cash input.
Also, you are not really gaining anything by buying equity. That "bought" equity is equal to the cash you used to buy it. It's the same money. The difference is it was free to use as cash...but when you take a loan out to get it back out of the property, it now costs you money.
You're much better off paying as little out of pocket as possible, and keep your cash as liquid, and in your control, as possible. The actual returns will/should be much higher.
Thanks for replying to my post! In other words, you are advicing me to take a bank loan instead of buying the property whole without any loan? May I ask why this is so? If I take a loan, I will have to pay more towards interest for the loan right? Unless it is much safer if I take a loan as compared to buying it using hard cash. Thanks!
You don't make a profit until you recover all the cash you put in. So a higher DP bringing more cash flow is an illusion. It will take you longer to recover your initial cash input.
Also, you are not really gaining anything by buying equity. That "bought" equity is equal to the cash you used to buy it. It's the same money. The difference is it was free to use as cash...but when you take a loan out to get it back out of the property, it now costs you money.
You're much better off paying as little out of pocket as possible, and keep your cash as liquid, and in your control, as possible. The actual returns will/should be much higher.
Thanks for replying to my post! In other words, you are advicing me to take a bank loan instead of buying the property whole without any loan? May I ask why this is so? If I take a loan, I will have to pay more towards interest for the loan right? Unless it is much safer if I take a loan as compared to buying it using hard cash. Thanks!
Follow the money:
1 - Who is actually supplying the money for the bank loan...and thus the interest? The tenant is...as long as you have positive cash flow (if you have negative CF...DON'T BUY IT).
2 - If you have a $100k property, and you pay all cash, and have $10k/year in cash flow...vs...paying only 20% down, and having only $5k/year in cash flow...which would you rather have? Keeping in mind, you only start to make any profits after you have recovered all the cash you personally put into a deal.
May I know why higher down-payment equals to more cash but lower CoCROI? Thanks!
A higher down payment equals more cash flow because you are financing less money. It also lowers CoC return since you used a higher down payment which means you've invested more cash into the place, thus lowering your return.
Look at it this way. I pay 100K cash for a property. My cash flow after expenses is $1000 a month. That's $12,000/ year. That's a 12% return annually. It will take 8.3 years to receive all of your money back. The other option is 20% down and a bank loan on the rest. In this scenario you put $20,000 down and say your mortgage payment is $500/month. Cash flow is now $500 instead of a $1000, but your CoC return is now 30% annually. It will take 3.3 years to get your cash out and your tenant is paying for the cash flow and your return on your money. Your CoC is infinite after 3.3 years. @Joe Villeneuve is correct. Use as little cash as necessary.
Good Luck.
Look at it this way. I pay 100K cash for a property. My cash flow after expenses is $1000 a month. That's $12,000/ year. That's a 12% return annually. It will take 8.3 years to receive all of your money back. The other option is 20% down and a bank loan on the rest. In this scenario you put $20,000 down and say your mortgage payment is $500/month. Cash flow is now $500 instead of a $1000, but your CoC return is now 30% annually. It will take 3.3 years to get your cash out and your tenant is paying for the cash flow and your return on your money. Your CoC is infinite after 3.3 years. @Joe Villeneuve is correct. Use as little cash as necessary.
Good Luck.
...but, it gets better:
Take $20k more from the $80k you're not using, and use it on another property, with the same numbers. You're now getting $1000 ($500/ea), with is the same as the $1000 you were getting using all $100k, but both property paybacks are still 3.3 years...and you still have $60k cash unused.
...or..., it gets MUCH better:
Take the full $100k and buy 5 $20k down properties. You now have $2500/month, using the same $100k as you would have done buying just one property with it...and all 5 payoff in the same 3.3 years...and, you have 5 properties gaining equity through appreciation and tenants paying off the loans for you.
May I know why higher down-payment equals to more cash but lower CoCROI? Thanks!
A higher down payment equals LESS cash because you drained your bank on the down payment. It does mean higher cash FLOW because your mortgage payment is a wee bit smaller. But what good is that? It is a lower COC return because you put down a LOT more to gain a wee bit of extra cash flow.
May I know why higher down-payment equals to more cash but lower CoCROI? Thanks!
A higher down payment equals LESS cash because you drained your bank on the down payment. It does mean higher cash FLOW because your mortgage payment is a wee bit smaller. But what good is that? It is a lower COC return because you put down a LOT more to gain a wee bit of extra cash flow.
Although this is 100% true, I take it a step further, and say it actually is less cash flow. If you take the entire $100k and use it, on either 1 property or 5 (see above), you actually will get a lower CF paying 100% in cash for a property.
Look at it this way. I pay 100K cash for a property. My cash flow after expenses is $1000 a month. That's $12,000/ year. That's a 12% return annually. It will take 8.3 years to receive all of your money back. The other option is 20% down and a bank loan on the rest. In this scenario you put $20,000 down and say your mortgage payment is $500/month. Cash flow is now $500 instead of a $1000, but your CoC return is now 30% annually. It will take 3.3 years to get your cash out and your tenant is paying for the cash flow and your return on your money. Your CoC is infinite after 3.3 years. @Joe Villeneuve is correct. Use as little cash as necessary.
Good Luck.
@Kenneth Garrett Good evening sir, thanks for repying to my post! I really appreciate it. However, I have a question. when you said that I would only start gaining cash flow profit after 8.3 years if I pay for my entire house without a loan. Does that not mean that I literally got this house for free after 8.3 years? Thanks
May I know why higher down-payment equals to more cash but lower CoCROI? Thanks!
A higher down payment equals LESS cash because you drained your bank on the down payment. It does mean higher cash FLOW because your mortgage payment is a wee bit smaller. But what good is that? It is a lower COC return because you put down a LOT more to gain a wee bit of extra cash flow.
Although this is 100% true, I take it a step further, and say it actually is less cash flow. If you take the entire $100k and use it, on either 1 property or 5 (see above), you actually will get a lower CF paying 100% in cash for a property.
Thanks for replying on my post! I really learnt a lot from you. Thanks for taking the time to advise me on this. However, if I would like to inquire, isn't the risk of 1 property is much less than 5 properties. However, if I am just asking, if I invest all 100k of cash into a 100k property, my CoCROI would be much lower but will that not mean that after I get all my cash back, I literally got this property for free without any debts anymore. Am I right on this? Thanks!
May I know why higher down-payment equals to more cash but lower CoCROI? Thanks!
A higher down payment equals LESS cash because you drained your bank on the down payment. It does mean higher cash FLOW because your mortgage payment is a wee bit smaller. But what good is that? It is a lower COC return because you put down a LOT more to gain a wee bit of extra cash flow.
Although this is 100% true, I take it a step further, and say it actually is less cash flow. If you take the entire $100k and use it, on either 1 property or 5 (see above), you actually will get a lower CF paying 100% in cash for a property.
Thanks for replying on my post! I really learnt a lot from you. Thanks for taking the time to advise me on this. However, if I would like to inquire, isn't the risk of 1 property is much less than 5 properties. However, if I am just asking, if I invest all 100k of cash into a 100k property, my CoCROI would be much lower but will that not mean that after I get all my cash back, I literally got this property for free without any debts anymore. Am I right on this? Thanks!
Yes, but you get all your cash on the 5 houses you only put $20k down in 3.3 years, since you only put $20k down on each.
Look at it this way. I pay 100K cash for a property. My cash flow after expenses is $1000 a month. That's $12,000/ year. That's a 12% return annually. It will take 8.3 years to receive all of your money back. The other option is 20% down and a bank loan on the rest. In this scenario you put $20,000 down and say your mortgage payment is $500/month. Cash flow is now $500 instead of a $1000, but your CoC return is now 30% annually. It will take 3.3 years to get your cash out and your tenant is paying for the cash flow and your return on your money. Your CoC is infinite after 3.3 years. @Joe Villeneuve is correct. Use as little cash as necessary.
Good Luck.
@Kenneth Garrett Good evening sir, thanks for repying to my post! I really appreciate it. However, I have a question. when you said that I would only start gaining cash flow profit after 8.3 years if I pay for my entire house without a loan. Does that not mean that I literally got this house for free after 8.3 years? Thanks
No. You paid $100k for it. The houses you came out of pocket for only the down payment, on all 5 of them, you only paid $20k each for them. The tenant is paying the rest of the $80k on each house for your through the rent.
In other words, you bought 5 houses instead of just 1 for that same $100k
That is an interesting point about the cash flow paying you back and in essence you got the house for free. Not sure I would look at it that way. Your return on your investment is paid back. Now your cash flow starts to take off. At this point after your return is paid back your return becomes infinite because you have no money in.
I would rather take advantage of multiple properties with leverage. This way your tenant is paying your mortgage and you get to take advantage of mortgage interest, depreciation, mortgage paydown, cash flow and as a bonus appreciation if any.
It’s a natter of choice. Nothing wrong either way but I think you can maximize your investment by using leverage.
May I know why higher down-payment equals to more cash but lower CoCROI? Thanks!
A higher down payment equals LESS cash because you drained your bank on the down payment. It does mean higher cash FLOW because your mortgage payment is a wee bit smaller. But what good is that? It is a lower COC return because you put down a LOT more to gain a wee bit of extra cash flow.
Although this is 100% true, I take it a step further, and say it actually is less cash flow. If you take the entire $100k and use it, on either 1 property or 5 (see above), you actually will get a lower CF paying 100% in cash for a property.
Thanks for replying on my post! I really learnt a lot from you. Thanks for taking the time to advise me on this. However, if I would like to inquire, isn't the risk of 1 property is much less than 5 properties. However, if I am just asking, if I invest all 100k of cash into a 100k property, my CoCROI would be much lower but will that not mean that after I get all my cash back, I literally got this property for free without any debts anymore. Am I right on this? Thanks!
When you say,
"...isn't the risk of 1 property is much less than 5 properties...",
I have three questions for you:
1 - What is at Risk?
2 - Who is at Risk
3 - Who is the Risk?
@Joe Villeneuve very well said! Thank you.
May I know why higher down-payment equals to more cash but lower CoCROI? Thanks!
A higher down payment equals LESS cash because you drained your bank on the down payment. It does mean higher cash FLOW because your mortgage payment is a wee bit smaller. But what good is that? It is a lower COC return because you put down a LOT more to gain a wee bit of extra cash flow.
Although this is 100% true, I take it a step further, and say it actually is less cash flow. If you take the entire $100k and use it, on either 1 property or 5 (see above), you actually will get a lower CF paying 100% in cash for a property.
Thanks for replying on my post! I really learnt a lot from you. Thanks for taking the time to advise me on this. However, if I would like to inquire, isn't the risk of 1 property is much less than 5 properties. However, if I am just asking, if I invest all 100k of cash into a 100k property, my CoCROI would be much lower but will that not mean that after I get all my cash back, I literally got this property for free without any debts anymore. Am I right on this? Thanks!
When you say,
"...isn't the risk of 1 property is much less than 5 properties...",
I have three questions for you:
1 - What is at Risk?
2 - Who is at Risk
3 - Who is the Risk?
Hmmm, thanks for replying! Currently, my down payment is at risk and if that cash flow is paid for, then the bank will be at risk. However, I’m not really sure how much risk investing in a property has so ignored possible, could you advice me on this? Thanks!
May I know why higher down-payment equals to more cash but lower CoCROI? Thanks!
A higher down payment equals LESS cash because you drained your bank on the down payment. It does mean higher cash FLOW because your mortgage payment is a wee bit smaller. But what good is that? It is a lower COC return because you put down a LOT more to gain a wee bit of extra cash flow.
Although this is 100% true, I take it a step further, and say it actually is less cash flow. If you take the entire $100k and use it, on either 1 property or 5 (see above), you actually will get a lower CF paying 100% in cash for a property.
Thanks for replying on my post! I really learnt a lot from you. Thanks for taking the time to advise me on this. However, if I would like to inquire, isn't the risk of 1 property is much less than 5 properties. However, if I am just asking, if I invest all 100k of cash into a 100k property, my CoCROI would be much lower but will that not mean that after I get all my cash back, I literally got this property for free without any debts anymore. Am I right on this? Thanks!
When you say,
"...isn't the risk of 1 property is much less than 5 properties...",
I have three questions for you:
1 - What is at Risk?
2 - Who is at Risk
3 - Who is the Risk?
Hmmm, thanks for replying! Currently, my down payment is at risk and if that cash flow is paid for, then the bank will be at risk. However, I’m not really sure how much risk investing in a property has so ignored possible, could you advice me on this? Thanks!
Can you restate your question
May I know why higher down-payment equals to more cash but lower CoCROI? Thanks!
A higher down payment equals LESS cash because you drained your bank on the down payment. It does mean higher cash FLOW because your mortgage payment is a wee bit smaller. But what good is that? It is a lower COC return because you put down a LOT more to gain a wee bit of extra cash flow.
Although this is 100% true, I take it a step further, and say it actually is less cash flow. If you take the entire $100k and use it, on either 1 property or 5 (see above), you actually will get a lower CF paying 100% in cash for a property.
Thanks for replying on my post! I really learnt a lot from you. Thanks for taking the time to advise me on this. However, if I would like to inquire, isn't the risk of 1 property is much less than 5 properties. However, if I am just asking, if I invest all 100k of cash into a 100k property, my CoCROI would be much lower but will that not mean that after I get all my cash back, I literally got this property for free without any debts anymore. Am I right on this? Thanks!
When you say,
"...isn't the risk of 1 property is much less than 5 properties...",
I have three questions for you:
1 - What is at Risk?
2 - Who is at Risk
3 - Who is the Risk?
Hmmm, thanks for replying! Currently, my down payment is at risk and if that cash flow is paid for, then the bank will be at risk. However, I’m not really sure how much risk investing in a property has so ignored possible, could you advice me on this? Thanks!
Can you restate your question
sorry, I have figured it out, thanks! By the way, does the BRRRR method work for flipping only? Also, why must I rent the property out before I sell the property? Why cant it just be "get a loan from a private lender, flip the house and sell it out" or "get a loan from a private lender, flip the house, get an offical loan from the bank (Refinance) and sell it"?
Your question: "By the way, does the BRRRR method work for flipping only?"
My Answer: The BRRRR method isn't used for flipping. The idea is to get your cash back out of a property by NOT selling it. Instead, you refinance it.
Your Question: "...why must I rent the property out before I sell the property? Why cant it just be "get a loan from a private lender..."
My Answer: You don't have to rent the property before you sell it.
Your Question: "Why cant it just be "get a loan from a private lender, flip the house and sell it out"
My Answer: Not sure what you're trying to say here, but "flipping" is the same thing as "selling".
Your Question: "...or "get a loan from a private lender, flip the house, get an offical loan from the bank (Refinance) and sell it"?"
My Answer: You can't sell the house, and then after that refinance it. Once you sell it. you don't own it anymore. You can't refinance a property you don't own.
Your question: "By the way, does the BRRRR method work for flipping only?"
My Answer: The BRRRR method isn't used for flipping. The idea is to get your cash back out of a property by NOT selling it. Instead, you refinance it.
Your Question: "...why must I rent the property out before I sell the property? Why cant it just be "get a loan from a private lender..."
My Answer: You don't have to rent the property before you sell it.
Your Question: "Why cant it just be "get a loan from a private lender, flip the house and sell it out"
My Answer: Not sure what you're trying to say here, but "flipping" is the same thing as "selling".
Your Question: "...or "get a loan from a private lender, flip the house, get an offical loan from the bank (Refinance) and sell it"?"
My Answer: You can't sell the house, and then after that refinance it. Once you sell it. you don't own it anymore. You can't refinance a property you don't own.
Thanks for replying! Pardon my lack of knowledge as I don't quite get you when you said "The BRRRR method isn't used for flipping. The idea is to get your cash back out of a property by NOT selling it. Instead, you refinance it." this is because when I refinance it from the bank, the loan just get switched from a private lender to an official lender. Hence, I still have a loan and no money at all. How does this work? Thanks!
When you do a BRRRR, you refinance the property...you're not selling it. It doesn't matter who the loan comes from.
When you do a BRRRR, you refinance the property...you're not selling it. It doesn't matter who the loan comes from.
yes, I will still have the loan, but how exactly do I use this "refinance money" to buy another property? Especially when my loan is slowly being paid by my tenants. Thanks!