Are down payments necessary?

Question

I’m trying to get opinions on if putting a large down payment on an investment property is truly necessary (BRRRR method). I’ve seen plenty of videos online but I get the feeling that the video creators are slightly biased.

Whitney Hutten · Answer

@Jacob Horn I've used 203K, hard money, private money, and cash for my projects.  Out of all those strategies, I like hard money the best.  My lender has me put 10% down and will finance 90% of the purchase and 100% of the construction.  I can then get a carry-out loan for 75% LTV conventionally OR up to 80% commercially.  This allows me to accelerate my money, do more projects (responsibly!) and shorten my investment cycle by avoiding long seasoning periods.  I'm also in more control of who does the work and can avoid the red tape using a 203K loan.  The only advantages of the 203K loan, I see, are a low downpayment AND that you can live in the property during construction.  PM me if you need more feedback or contacts.

Nick N. · Answer

Generally with the BRRRR method you buy and rehab the property with cash, then refinance to pull your money back out minus the 20%. If you owner occupy you can do much lower down payments through programs like FHA but they also have rules about how long you have to live in the property. Commercial financing generally requires 25% but anything 1-4 units is usually 20%.

Mike Cumbie · Answer

As far as a downpayment in general, yes, the bank or holder doesn't want to loan on 100% of value (they take all the risk if you walk away and decide it's too tough, get bored, hit a little snag). There is nothing holding you to the property. As far as 203K loans, I am not a huge fan. mainly because of the paperwork involved and the many eyes on the property. You really can't shop bids. You don't get competitive bids really. You are calling a contractor for a quote, then sending it to a bank who looks it over, then they decide if it's a fair price. if so you are calling the contractor to now schedule and they won't get paid until it's inspected by a third party. There is no reason for them to do all that legwork on a "possible" return. You can accomplish a whole lot more by having $5,000 ready to start the day they give you a quote.

Just my 2 cents and good luck!

Bob Prisco · Answer

@Jacob Horn of course you need a down payment ,,

Jacob Horn · Answer

@Nick N. Thanks for the clarification! My next question is, in your opinion is taking out a 203k loan worth paying the interest on the rehab? Obviously the purpose is the rehab the house to increase equity to held acquire more doors

John Underwood · Answer

If your using bank financing then it is what ever the bank requires. Private and hard money is usually negotiable.

If you are getting your money back after refinancing then it shouldn't be a big deal unless you don't have the funds, then you need to get creative. Maybe see if owner will carry a 2nd mortgage for the downpayment for 1 year etc.

Are down payments necessary?

Most Popular Reply