Is 100% Financing Always a Good Thing?

Question

There's a lot of discussion around financing as much of a deal as possible.

But I'm curious where investors draw the line.

If a deal could potentially be financed with very little cash out of pocket, would you automatically prefer that?

Or would you rather put some of your own capital into the deal?

I'm particularly interested in how investors weigh:

Leverage vs. liquidity vs. risk.

What's your philosophy?

Nick Belsky · Answer

@Linda Murray

If you plan to sell the property, then the risks are much lower versus refinancing. IMO.  I steer my clients away from 100% financing if they intend to hold as a rental only because I can't tell you how many clients have come to me this year trying to get 85% or 90% refis on properties they purchased with 100% financing only to find their current appraisals came in low at the time of refi.  Now they will have to either sell to try and break even or inject a whole lot of cash to close the refi as they do not have enough equity.  When purchasing prior to doing work, ARVs are very subjective... markets can shift easily and quickly.

If you are building in quite a bit of cushion for your ARV, then it may be worthwhile.  The lenders I know of whom do 100% are very very expensive and you end up spending several more percentage points chasing the idea of 100% financing versus putting those funds into equity that you can potentially recover later on.  Lender fees and points are sunk costs.  Putting 10-15% down goes directly to equity and more often than not, the lenders are almost all around 1-2% for origination these days.

My two cents.

Cheers!