If you can put 20% down, should you?

Question

House hacking teachers commonly say "put 3.5 to 5% down" and rent out the other side.

But if you're able to put in a 20% down payment, should you?

When people model cash flow is it assumed that 20% down payments are used?

I look at many houses that cash flow well with 20% DP but not a 5% DP.

Bill B. · Answer

You can earn a guaranteed 6-7% return plus you pay less origination fees plus you don’t pay another percent in PMI?  If you have a guaranteed 10% after taxes return, put less down. Otherwise your upside is finding a 9% deal to make an extra 1% on $50k? A $500/yr savings is the perfect result? Not finding another deal is a 7+% loss on that $50k? $3,500/yr?

The least down possible was THE play when mortgage rates were 2.5-4% you didn’t need to earn much to beat that. The stock market exploded because you only had to earn a 1 or 2% return to beat the guaranteed bank return. Now you have to earn 6%, same theory.

Ray Hage · Answer

That's a tough question based on very little info so you'll hate the answer to this, "it depends". Most places won't cash flow with under 5% down.

Let's say you have enough to put down 30%....So here's a scenario where you put 5% down. You buy a duplex and rent out one side, let's say your CoC is -3% and that shoudl be fine. 3 months later, you can buy an another property as well that is getting an 8% CoC. Now you have two separate properties vs just one in buying your primary duplex with 20% down.

For your primary, put the minimum down. For investment properties, you may HAVE TO put a bit more down to get a reasonable interested and CoC return. If your RE goal is just to have a primary and you don't plan on other investments, then sure, just put in a big down payment

Marcus Auerbach · Answer

Depends on what you want to do AFTER the first property. About half of our clients buy a second duplex after one year, which is the required owner occupied period. So you could keep half of your downpayment dry for the second one.

Not being able to buy a second one is called opportunity cost. But if you don't intend on a #2 then 20% makes sense, between lower payments and no PMI it's a worth while ROI.

Milwaukee is super competitive, so FHA is often a non starter to get an accepted offer in most cases, a conventional loan with a higher down payment is much more attractive to sellers.

Chris Seveney · Answer

@Evan Swanson

What’s your interest rate compared to what are you going to do with that money? If it is having you save 6% interest to go into a bank account that gets 0.1% then yes it makes sense

It’s also what is your level of risk if the property drops in value - do you still have that cash to recover?

Like 99.999% of questions on BP - it depends but I would say yes your better typically putting more down when rates are higher if you do not need that cash for other things

Bill B. · Answer

Does your 10% vs 20% downpayment graph account for extra origination fee on lower downpayment? It’s not much but it’s added to loan balance so there’s also interest and a payment on it.

Does your 10% vs 20% downpayment account for PMI? Same thing. It’s not a huge amount but it’s added to your loan so more fees, more interest, higher payment.

The easiest way to explain is I believe everyone here would agree you’d NEVER put down 19% and pay PMI instead of 20%. So either 20% is always better, or it’s better down to a certain percent. The PMI would be equal to 50-100% interest rate at 19% vs 20%.

if you’re a flipper, great out down as little as possible, you will be buying lots of properties and that’s how you use cash as a tool. But I think too many people focus on cashflow with long term holds. Loan paydown is just as real as cashflow and that’s how I use cash. If cashflow is really the goal, pay off your loans a fast as possible. You can live comfortably on 5 paid off properties and you sleep soundly at night.

Evan Swanson · Answer

Well, in % terms 10% shows a greater return but in absolute dollars 20% shows a better return. So that part is still cloudy for me. Any more thoughts on that?

But I see what you mean by comparing money not invested to the mortgage rate.

If I decided on a 10% DP and and not 20%, saving $25,000 on the DP, then the cost of withholding 25,000 of equity is an additional 25,000 of debt at 6.7% interest ($1675/year). So, unless I can find a place where that $25,000 will produce me more than $1675/year (6.7%), just include it in the DP.

If that money just sat in the bank or wasn't invested at a better rate (other business or rehab resulting in material increase in home value), then I just took on more debt and interest for no reason.

Eliott Elias · Answer

A 20% down payment will allow you to cash flow more. Most can't put 20% down. If you can, you should.

Theresa Harris · Answer

It may be different in the US, but in Canada, if you put 20% down (or more), you don't have to pay for mortgage insurance.  I did the math many years ago the the cost for mortgage insurance was about the same as 20% of the purchase price-you just paid for it over time.

Account Closed · Answer

@Evan Swanson for me it is about what your plan is and what the numbers look like when you move out and on to your next property. If your plan is just to save some money while you are living there, then sell it in a couple years, then put down as little as possible. If your plan is to keep the property and rent out the extra unit when you move out, then you may have to put more down so that the numbers work. It is all about the numbers!

If you can put 20% down, should you?

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