Cash Flow and downpayment

The general rule of thumb on here seems to be not to buy a prop. unless it will cashflow at least $100 a month. But does this advice only apply to those who will be making low downpayments? Obviously a property may not cash flow at 10% down, but may cash flow if you put 30 0r 40% or 50% down.

Putting more down will not change a bad deal into a good one. The additonal down payment can go towards another property. I’d use about a 0% to 20% down pmt. ( or the least amount a lender allows). I think its best to purchase a property for at least a 20% to 30% from the market value, use a 0% to 20% down pmt. The property should should have a cashflow of about $100/ month/unit minimum. I feel that if you purchase this way, you’ll have enough equity to save your butt if you run into trouble, and build your wealth if you don’t. It take some digging to find these type of properties, but you won’t last long if you don’t buy properties right. Good luck.

thanks phlemboy.

If you are financing your purchase, you should calculate your return on invested capital to see if the purchase makes sense.

Let me illustrate with an extreme case. Let’s buy a rental property for $100K cash and own the property free and clear. If you rent the property for a mere $100 monthly cash flow did you make a good investment?

Answer this question by calculating your return on invested capital. Your $100K investment is earning $100 per month, or $1200 per year. The APR on your $100K is 1.2% or a little worse than the short term treasury yield. If you take that $100K and buy a six month bank CD with a 3.2% rate, the return on your money is 250% better than the rental property with none of the risk of rental property ownership.

If you use 80% financing and just put $20K down, then a $100 monthly cash flow gives you a 6% return on your invested capital. The trick is to balance the lender’s required minimum down payment amount against the return your invested capital can earn. If you can get a better return on your cash elsewhere, then maybe your money should be invested elsewhere.

Thanks Dave. It seems so obvious now when you phrase it that way. But then I guess that’s why I’m one of the people asking questions instead of giving answers on this board :biggrin