Is zero down almost guarantee good Cash on Cash ROI?

Question

With the ability to use the VA zero down on homes, is it almost a guarantee to always get 10%+ cash on cash ROI? Is there something I’m missing?

I saw a video somewhere that said a low down payment can actually be a bad thing? Can someone explain how/why?

Thanks!

Joe Villeneuve · Answer

The answer to your first question is "no".

The answer to your second question is "throw away that video".  As long as you have positive CF, your tenant is paying your mortgage, and all the interest charged.  Your only cost is your DP.

Here's my question to you:  "If you have a zero DP, and positive CF, how much did the property cost you?"

Bryan O. · Answer

@Min Kim I think you need to understand how to calculate returns or analyze a property a little better. Any specific rate of return is never guaranteed for any property. Your video is correct because your payment is higher because your loan is bigger. Is it a big deal? Not really, when many people are doing 3.5% down or 5% down.

@Joe Villeneuve "If you have a zero DP, and positive CF, how much did the property cost you?" It costs the ability to buy another with 0 down for the life of that loan. My first $0 down property cost me the next 6 years of investing. Opportunity cost is the most expensive part of many transactions.

Michael Goldsmith · Answer

It's not necessarily a good thing.  A low or 0 down payment means you're taking a larger loan.  That means more interest down the line, and a higher monthly mortgage payment.  It's going to take you a lot longer to gain a good foothold in your equity stance as well, since you'll mostly be putting your money towards the interest and not the principle.  Now, if you're getting a REALLY good rent relative to the cost of your mortgage, then that may be another story, but thats a lot of margin to make up

Ned Carey · Answer

@Min Kim NO, putting less down increases your ROI if and only if the interest rate on the borrowed money is less than the return for all cash. This is the usual situation but it is not always true.

Now borrowing more generally increases you risk but not always.

Joe Villeneuve · Answer

I understand completely what lost opportunity is.  You don't understand what I'm saying, because I'm agreeing with you in principle...just not in this application.  I understand that if you were to buy a property that has a zero DP, and it has poor to bad cash flow (even though it is positive) is a bad investment if you have only one chance to use zero down.  I've already state, multiple times, that I would never do that.

Where we differ here, is you're assuming that you will only get one zero down opportunity...so don't blow it.  If that was true, then I would be in full agreement with you regarding lost opportunity.  I just don't agree with the idea that you will/can only have one zero DP opportunity in your REI life.

Bryan O. · Answer

@Joe Villeneuve I don't know another way to describe it to you and am a little shocked since you are typically sharp. I will try to do it with basic math since you haven't had enough coffee for abstract. Which option you would choose:

Option 1: You have $0 down and super small reserves. Purchase a poorly chosen property that leaves you $0 remaining and nearly no increase in cash flow

Option 2: You have $0 down and super small reserves. Purchase a property that leaves you $0 remaining and provides $1k/month in cash flow and forced equity of $100k in 6 years

The difference between the 2 is called opportunity cost. By choosing Option 1, you stifle future growth and cost yourself years of compound or even exponential gain. That was what I did. No clue where you are getting "6 months" from in your post. Focus on quality of post, not volume. If this scenario doesn't help you understand, I don't have any other color crayons to draw it in.

Joe Villeneuve · Answer

The correct answer is "it cost you nothing".  If you didn't put anything in this deal, how does it "cost you the next 6 years of investing"?

Nigel Guisinger · Answer

ROI Stands for return on investment. If you have no money down and have positive cashflow there is no number to divide by To get the percentage roi. You need to look at cashflow, debt pay off and application on this deal to see total return and figure that against the opportunity cost that you lose by doing this deal vs another deal.

Bryan O. · Answer

@Joe Villeneuve you don't understand what a lost opportunity is. In a $0 down scenario, you seem to believe that the only possible option that exists is the one you took, even if it is bad. You miss the understanding that the other 100 deals that you could have done that are significantly better are, well, significantly better. Because you blew your only $0 down option, you have significant lost opportunity because of all the deals you can no longer make because you no longer have capacity and you are building capital at no or low speed. I won't bother to reply anymore because your credibility with me is gone and there is no point wasting anymore time with it.

Joe Villeneuve · Answer

When did the choice become a terrible option (#1), and a good option (#2)?  Of course I would never choose Option 1.

The questions was, "...With the ability to use the VA zero down on homes, is it almost a guarantee to always get 10%+ cash on cash ROI? Is there something I'm missing?"

My answer was defining what the true cost was ti the REI.  You introduced an extreme case of $0 DP and a bad CF situation...which no reasonable investor would ever do...which was never part of the original question.

You like numbers?...so do I.  Here's mine:  REI has no cash, which is why they are doing a No DP in the first place.

Option #1 - Property/Deal Numbers:  STarting with NO Cash$0 DP; $100k cost...all leveraged, positive CFTotal Cost to REI = $0 because, due to positive CF, the PITI is being paid by the tenant out of the rentSummary before deal is made:  No money; NO cash flowSummary after deal is made:  No money; Positive Cash FlowLost opportunity = None.  If you have no cash to begin with, there's no opportunity other than this to begin with.Option #2 - Property/Deal Numbers:  Starting with $20k (pick a number here)$0 DP; $100k cost...all leveraged, positive CFTotal Cost to REI = $0 because, due to positive CF, the PITI is being paid by the tenant out of the rentSummary before deal is made:  $20k (pick a number here); NO cash flowSummary after deal is made:  No money; Positive Cash FlowLost opportunity = None. You still have the same $20k cash you had to begin with, you have the same opportunity you had to begin with.

Is zero down almost guarantee good Cash on Cash ROI?

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