Is putting 3% down or traditional 20 % as downpayment better :- ? Need Advice

New to Real Estate · Long Beach California · Member since 2023 · 5 posts · 6 votes

BP family: If money for downpayment is not a problem what would be sane thing to do in this interest rate environment ? Is putting less down and holding onto your cash now for a refi- later when the interest rates come down a good idea?

I am trying to buy a condo and was thinking of going the FHA route with 3% down but that also means i would end up paying more interest at the end of my term. The value of the property i am looking at is around 550K

Thank you and appreciate everyone's help.

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Matthew Kwan

Lender · Seattle, WA · Member since 2022 · 482 posts · 768 votes

Hi Sidd, it really depends on what your long term goal on investing real estate. You want to invest just to have a place to live and potentially offsetting your mortgage payment by renting out the vacated rooms or having x amount of cashflow in the future? In this case, I would recommend staying away from condo as they have high HOA fees and tends to increases every year. Also for condos, you only own the unit but no the actual land itself. You should always looking into single family houses or multifamily, as there is an actual land that you own and potentially build ADU/DADU in the foreseeable future.

Also, the beauty of FHA is that it allows you to put 3.5% down payment to invest in 1-4 units. However if you plan on buying 3-4units, there is a trigger rule for FHA, it is called the self sufficiency test. In order to past this SS test, your market gross rental income at 75% has to be more/equal to your monthly mortgage payment (PITIA). These are something to be considered. Feel free to DM and we can talk more about it @Carlos Valencia @Albert Bui

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Cody Mitchell
Investor · College Station, TX · Member since 2019 · 40 posts · 25 votes
3y
Usually putting less down and holding onto the cash is better in my opinion, but it depends on your circumstances and goals. Is your goal to use leverage to reach FI or to own paid off properties? If you're wanting to try to retire early I would say put less money down. Like you mentioned you can also refinance later.
That being said, when looking at properties if you intend to use the property as a rental within the next few years you should also pay attention to what it will rent for. If you need to put 20% down in order for it to cashflow that is also something to consider (although I would avoid such properties if possible). Hope this helps!
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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@Sidd Chitnis
When interest rates were low putting less down. Depending on your rate though might be better to put more down as having that cash sitting on the sidelines or even invested may not net you the interest
For example your rate is 6%, if you invested that money you would need 8%+ in a liquid investment to make it worthwhile because of tax
If you invest in real estate it would depend on performance of deal - and do you want to take that risk.
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Sidd Chitnis
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New to Real Estate · Long Beach California · Member since 2023 · 5 posts · 6 votes
3y
Quote from @Chris Seveney:

@Sidd Chitnis
When interest rates were low putting less down. Depending on your rate though might be better to put more down as having that cash sitting on the sidelines or even invested may not net you the interest
For example your rate is 6%, if you invested that money you would need 8%+ in a liquid investment to make it worthwhile because of tax
If you invest in real estate it would depend on performance of deal - and do you want to take that risk.
Hello Chris. Thank you very much for your response. Can you elaborate a little more on what you mean by 8% in a liquid investment to make it worthwhile for a tax? Are you talking about investing 8% somewhere else other than real estate?
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
3y
In Canada if you put down less than 20%, you have to pay for mortgage insurance. It is added to your payments, but the overall costs of it is about the same as putting 20% down.
It depends on your goals. 5% down means you have more money left-yes you pay more in interest and mortgage insurance. It also means your debt is higher. So if you plan on buying more houses and your debt to income ratio still has room to buy more after you buy the first home for you to live in, then putting 5% down leaves you money to buy the next home.
Note that if you want to buy a rental as your second home, you will need 20% down for that. What some people do is buy a primary residence, live in it for 1-2 years, then turn it into a rental and buy a new primary using 5% down.
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@Sidd Chitnis
Yes. Look at it this way / let’s say you don’t put much down- you are paying 6% interest on the property
If you take the money you were going to use and invest it and only get 5% (after tax) - you are losing money as you could have put it into the home paying 6%
The reason I noted 8% is because if you invest you will be paying taxes on that money eventually and that needs to be accounted for
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Matthew Kwan
Lender · Seattle, WA · Member since 2022 · 482 posts · 768 votes
3y
Hi Sidd, it really depends on what your long term goal on investing real estate. You want to invest just to have a place to live and potentially offsetting your mortgage payment by renting out the vacated rooms or having x amount of cashflow in the future? In this case, I would recommend staying away from condo as they have high HOA fees and tends to increases every year. Also for condos, you only own the unit but no the actual land itself. You should always looking into single family houses or multifamily, as there is an actual land that you own and potentially build ADU/DADU in the foreseeable future.

Also, the beauty of FHA is that it allows you to put 3.5% down payment to invest in 1-4 units. However if you plan on buying 3-4units, there is a trigger rule for FHA, it is called the self sufficiency test. In order to past this SS test, your market gross rental income at 75% has to be more/equal to your monthly mortgage payment (PITIA). These are something to be considered. Feel free to DM and we can talk more about it @Carlos Valencia @Albert Bui
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Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
3y
Quote from @Sidd Chitnis:

BP family: If money for downpayment is not a problem what would be sane thing to do in this interest rate environment ? Is putting less down and holding onto your cash now for a refi- later when the interest rates come down a good idea?
I am trying to buy a condo and was thinking of going the FHA route with 3% down but that also means i would end up paying more interest at the end of my term. The value of the property i am looking at is around 550K
Thank you and appreciate everyone's help.

Currently the spread/difference between conventional and FHA is huge given the recent incentives the government has put on FHA and the additional costs they've put on conventional products. The spread is roughly .75-1.00% difference in rate however doesnt go with out saying that FHA has some inherent draw backs too like its upfront financed 1.75% MIP and the slightly higher annual MI thats paid monthly .50-.85% per month.

Given you're in the LBC the housing stock is a bit older there too so depending on which property you pick you might have more issues with FHA given older homes tend to have galvanized steel plumbing, clay drain lines, and a hodge podge or frankstein other plumbing types over the year when repairs were done by previous owners. I've seen this with electrical (kobb and tube, aluminium, some newer copper wiring, no grounding, or faulty breakers) as well so its something to note with older housing stock.

Best of luck on the property search and feel free to reach out for more of what other investors are dealing with or financing scenarios.

@Matthew Kwan @Carlos Valencia
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
3y
a 3% loan will normally have higher lender costs and loan rate.

The question is the opportunity costs on the 17% difference.

Would it take you a significantly longer time to gather the 17% difference?
If yes, there is a lot of opportunity costs as you would be losing out on time towards experience within real estate investing.
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