What Amount Down Makes The Most Sense
So I'm looking over my figures and trying to figure out what makes the most sense for money down. There are deals where I can do a zero money down deal but you make very little money doing so. You can also go the other way and put a large amount of money down but your ROI will be very low. What % of money down makes the most sense. Or in other words, where is the diminishing point of return.
Any ideas... if this confuses you I can explain more...
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if you put zero down and make money.....what is your return? It can't be measured, it's infinite.
Many people don't have money to put down. If your not in that boat, then your one of the lucky ones. But why use money to make money if it's not needed. I would take an infinite return all day long and make those little deals add up.[ Edited by nebulousd on Date 01/09/2004 ]
Hey,
Based on your question, I have to presume you are talking about rentals.
I don't think the statement concerning infinite return properties is 100% correct for two reasons:
1) Risk-- If you purchase a $100k property (and have none of your own money in it) and after covering all your expenses you make $1 a month, this is infinite return. BUT you are responsible for $100k debt, so your amount of RISK to REWARD is insane. Most people would instinctively know that this level of money ($1) is too low to get involved with, despite the infinite return, which means that it is NOT your % return but some other factor that is important.
2) Time--Even if you make a huge $100 per house, you are limited to the number you can manage and acquire during any set time period.
I don't think anyone can answer the question as to what is best for you, without more information as to what you are looking for and what you have as far as resources.
I guess I wasn't thinking rentals. I was thinking subject to. I don't rent so i guess I was looking at this from a sub to prospective. My risk is tied to the number amount I write on my checks.
Dale,
Why are you posting your question in the Credit Repair forum? Are you hoping to improve your FICO by increasing your down payment?
I believe that answer is somewhere in Bruces response. Back to risk management.
Yeah.. after I posted this I was thinking.. geez.. maybe this shouldn't be posted here. Anyway... I do have money to put down on a property. And even though ROI is a great way to measure how well your money is invested, if you have an infinite ROI but are only getting $1 back, it might not be worth it. So I was thinking that I may get better results putting 5% down, 10% down or 20% down.. Those are usually where the breaks are in the interest rates for lenders. I was wondering for those people who DO put money down on properties, what the amount that makes most sense for them...
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I'd rather use other peoples money as well. The equity created by downpayment money is usually only recovered when you sell, refinance, or borrow against. I'd rather "control it" than own it.
Bruce - once again you are telling it like it is!
Those who have money will put it down and be happy for doing so.
Those who don't will continue to pretend that it isn't really desireable to have.
ddemott - you are going to have to run some scenarios and see what the numbers tell you, only you can decide the rate of ROI and risk you can tolerate or works for your investment goals.[ Edited by The-Rehabinator on Date 01/09/2004 ]
Let me give you a scenario.....
Purchase a 25k property cash.. (3bd home in a rougher area, but still ok)
Rehab it for 10k.....
Section 8 it for 750/month
Get it appraised for 60k
Finance it with 20% down....
Closing Costs are 3k...
Put 10k in your pocket at closing, pay no income tax as this cash is financed
Have a positve cash flow of $200 + per month...
Do this 200 times over the next 10 years, pay off all your properties, then check your cash flow and equity....
Now thats what I would do....
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I agree with Bruce.
Its not the down payment. It is the RETURN on RISK that is important.
Remember a down payment is nothing but the vehicle to get into a deal.
Follow the rule that you dont want to be in ANY investment property more that 65% of ARV. AND have cash reserves to pay for the unknowns. i would say at least 15k. Have a 100% back up plan if you are going to mess with sub2 mess and L/O deals.
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Someone explain to me as to how you measure risk?
Dale,
If I can put in my two cents.. I'm a Realtor in the Boston area, and work with a lot of investors, as well as finishing up a 3-Family Condo conversion. Most of the investors I work with are Buy and Hold / landlord types looking for cash flow positive properties... I stumbled upon this site as I was researching my next personal R.E. investment and have been thoroughly impressed with the quality of info here..
Anyway.. We always look at Cash-On-Cash return for our people for properties they plan on renting. Example :
You plan on buying a $500K property with 20% down ...Take the amount of out of pocket investment and that is $100K.
Figure out your yearly cash flow = Rental income in - mortgage - insurance - Water/Sewer - insurance - Management fees - Vacancy - Taxes = Yearly profit.
Around here ( and I must admit.. most of the people on this board seem to find extraordinarily good deals, and good for them ) .. 10-15% Cash - on - Cash is the minimum.. so you'd be profiting 15% ( $15,000 ) every year as you own.
I am interested in the %'s you guys usually strive to get in your areas as well.. but our guys only care what they are putting out of pocket and the % return they get off it.
-MikeD
[ Edited by mikedefran on Date 01/09/2004 ]
I agree. I'm going to have to run over several numbers to see what works best for me. Does anyone know the typical differences in interest rates given 5% down, 10% down and 20% down for say a property that is worth $100,000 for excellent credit? Even if I can get the difference in interest rates between the ones I've listed I can see what might make more sense for me for what goals I wish to accomplish.
Quote:
On 2004-01-09 13:00, The-Rehabinator wrote:
Bruce - once again you are telling it like it is!
Those who have money will put it down and be happy for doing so.
Those who don't will continue to pretend that it isn't really desireable to have.
ddemott - you are going to have to run some scenarios and see what the numbers tell you, only you can decide the rate of ROI and risk you can tolerate or works for your investment goals.
[ Edited by ddemott on Date 01/09/2004 ]
risk is measured for each ones comfort zone. it cannot be measured by another.
Some people can play pot limit and others only penny annie
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If we are only discussing rental property for your long term investment holding, here is the gist of several discussions from the Landlord Forum:
Rather than looking strictly at your ROI, consider both your monthly cash flow and your Internal Rate of Return (IRR).
If the ratio of my Net Operating Income to my debt service (P&I only) is at least 1.25, then I am sure to have enough cash flow to handle vacancy and unscheduled repairs. This ratio is called Debt Coverage Ratio (DCR), sometimes called Debt Service Coverage Ratio.
You can run your cash flow analysis with several down payment amounts to determine how much downpayment is needed to achieve a DCR of 1.25.
Next, for that cash flow, look at your Internal Rate of Return. I personally use an eight year holding period for this calculation and assume a 5% rate of appreciation. If the property is sold at the end of eight years, will your IRR be acceptable? I look for an IRR of 20% or greater. The less money down, the higher the IRR.
Using the DCR and IRR criteria as I have outlined will warn you away from those less profitable investments. The infinite ROI is great for property you can easily flip for quick profit, but is not a reliable discriminator for your long term rental holdings.
Great reply.. might need to sit and digest this one for a few minutes
Quote:
On 2004-01-10 10:05, DaveT wrote:
If we are only discussing rental property for your long term investment holding, here is the gist of several discussions from the Landlord Forum:
Rather than looking strictly at your ROI, consider both your monthly cash flow and your Internal Rate of Return (IRR).
If the ratio of my Net Operating Income to my debt service (P&I only) is at least 1.25, then I am sure to have enough cash flow to handle vacancy and unscheduled repairs. This ratio is called Debt Coverage Ratio (DCR), sometimes called Debt Service Coverage Ratio.
You can run your cash flow analysis with several down payment amounts to determine how much downpayment is needed to achieve a DCR of 1.25.
Next, for that cash flow, look at your Internal Rate of Return. I personally use an eight year holding period for this calculation and assume a 5% rate of appreciation. If the property is sold at the end of eight years, will your IRR be acceptable? I look for an IRR of 20% or greater. The less money down, the higher the IRR.
Using the DCR and IRR criteria as I have outlined will warn you away from those less profitable investments. The infinite ROI is great for property you can easily flip for quick profit, but is not a reliable discriminator for your long term rental holdings.
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