If I want to buy a home and decide to put say 50% down, then does the seller drop the price of the house b/c I am putting much more than 20% down?
Thanks.
As far as the seller is concerned, you are paying all cash for his property. It does not matter that some of the cash comes from a mortgage loan and some comes from your pocket. It is all cash when it hits the settlement table. The seller probably does not care how much or how little of the purchase price you are financing.
DaveT, this bring up a question that I have also.
How come I hear that if you can buy houses all cash, you have a better chance to get stuff cheaper?
If the seller was trying to get 60K…
Like if I call up and say to a seller “I will give you 40,000 cash and close tommorow” dont I have a better chance of getting the house cheaper than if I call and say " Ill give you 45,000 cash for your house"?
Maybe people say its cheaper because you dont have to deal with paying interest on the morgage?
There is no advantage to the seller if you use a larger down payment.
The advantage to you is that you might be able to get better loan terms.
If you are paying all cash, you can often get a better deal from the seller, because the seller does not have to worry about whether the deal will fail because of financing problems. A lot of deals fall out of escrow when the financing falls through.
First, this is now a different question. vtecvtec was asking whether he would get a better price if he made a larger downpayment. If his offer to purchase includes financing, I am saying that it won’t matter to the seller how large the buyer’s downpayment is. That does not change the cash due to the seller at the settlement table.
The advantage of using your own cash and no financing is that you can close quickly. Suppose a seller is given two offers on the same day, one has a financing contingency with settlement in 60 days, while the other is all cash (no financing contingency) with settlement in 10 days. If the seller’s property has been on the market for awhile with little interest, the seller may be anxious for the sale to happen. Often a seller that is anxious to sell will accept a lower all cash offer for the guarantee that the sale will close and their home sale ordeal will be over.
If the seller is not that motivated, it won’t matter whether you have all cash or use financing. This seller wants his price and won’t accept less.
Also keep in mind that the more you put down on an investment property, the less return on your investment. The beauty of REI is letting the tenants pay the mortgage. You could buy 5 properties @ 10% down and own all 5 after the mortgage is paid. Or you can can buy one property and limit yourself by tying up more of your money. The lower mortgage on one property will not produce enough cashflow & equity to offset the cashflow and equity in 5 properties. Just my humble 2 cents.
The more money you put down means that essentially you are buying cash flow, from yourself. Doesn’t make sense at all. The previous post is dead on. If you had 100k to spend you could buy 1, 100k property. Or you could put 20% down on 5, 100k properties. I would take my 5 props. over your 1 any day.
I usually buy all cash. My criteria for a rental purchase is a minimum 10% yield
(yearly rent - all yearly operating expenses)/(purchase price + capitol improvements necessary to rent).
I can’t get 10% anywhere while controlling the investment like I can in real estate.
In addition to the contingency risk and time factors, cash can often get you a better price because, if you’re rehabbing, you can buy properties others can’t buy because the bank simply won’t lend to buy a dump. The pool of potential buyers is significantly reduced (supply and demand and all that).
If I need cash for additional purchases I can always refinance an existing property so I can …BUY CASH. In the meantime, I’m getting a minimum of 10% on my money
This yield does not take into account appreciation after the usual rehabbing necessary to rent the place.
Then again, I only have few properties and am still learning.
jmd_forest
jmd,
I think there would be banks that would lend you money on a rehab if were to put about 25%- 30% down. That’s what my local banks require.You could then use the other money to purchase a few more properties. So you’d have about 3 properties for the same amount of money for 1 property. I prefer to use other people’s whenever possible. To each their own.
Let me give you a reason not to do this anymore…LAWSUITS! :shocked
The first time you get sued and some lawyer sees that you have a whole bunch of equity in your properties they’re going to come after it. That’s one big reason to keep your properties highly leveraged.
Using your formula, if you have a 10% yield by paying all cash, you still have a 10% yield if you use financing. What you are describing is the Cap Rate and that is not affected by the presence or absence of financing.
Yes, I still get the 10% with financing, but the balance that is left in the bank collects 5%. My limiting factor is finding good properties to buy, not the money to buy them. When I run out of money to buy them either I’ll stop buying or change strategies.
Regarding asset protection: I carry significant insurance.
jmd_forest
Another counterpoint to the “leverage to the hilt” arguement is that a larger downpayment buys down risk. Especially when new and inexperienced this could be the difference between surviving the learning curve and getting taken under like so many beginners in this business.
Leverage is a two edged tool that can provide greater returns if used properly, and can take you down in a hurry when you are overextended and face a setback.
If you have the ability, buy for cash at first. This allows you to learn the business with a lot of safety. Once you understand the numbers and how much expenses really are, then start to leverage up the properties to an acceptable level.
Read Dave Ramsey. I don’t follow his advice of all cash investing, but there are some great points to consider, especially about absorbing downturns. On top of that, for many people there is the sleep at night/debt ratio. How tight can the be and still sleep?
Just a few thoughts,
DB
I agree with tatertot…
The amount that you ae painted into a corner on is yur oouwn strategy! it is as the Escrow Business License sees it in the HUD 1 Report … I certainly would use any advantage of all cash records to the City to my advantage… and buy paying in all cash deal you have a right to a 3-20% discount for all cash ! … now the smart thing to do ? Negotiate with the Seller and have them [pay\ all closing costs )] and with the escrows ability and license and as a josephs cloak of colors , buy back the closing costs as a tax deducible to you and transfer the reciepts to a Bull of Sail … there is your win win with chs PEI system … no. You do not want the CASH ,… do not be stupid!
I wonder why every retailer I deal with laughs at me when I ask for a discount because I am paying cash.
I don’t know what country you are in, but in the USA, there is no “right” to a discount when paying in cash.
What?? Huh?? :banghead :banghead :banghead
[[[[[…You could buy 5 properties @ 10% down and own all 5 after the mortgage is paid. Or you can can buy one property and limit yourself by tying up more of your money…]]]]]
Orrrr… you could take your $100,000 cash, get a screaming deal because you offer all cash and can close fast. Or even better, you can buy a property that the banks won’t finance, but that can be made financable.
You closing costs will be really low (maybe $1,200, instead of $5,000), and you don’t pay any pmi, which can be over $100 a month with no benefit to you.
Then you fix the place up, take out a $100,000 mortgate-- which if you bought right and know how to fix a place efficiently might leave as much as 50% equity in your new property.
Then you take your $100,000, and get another screaming deal, because you can pay all cash and close fast.
Just keep repeating, and you can end up with those 5 house, with large equity in each one, and STILL have every penny of your $100,000 to buy the next one.
Maybe you just haven’t done enough deals, yet, phlemboy, to be able to understand it. Don’t beat your head on that wall to long, or you will give yourself brain damage.
I think phlemboy might actually agree with you. I took his comment as an expression of his frustration with shayshay’s unintelligible response.
Dave T, That’s exactly what it was. Sorry for the confusion tatertot.
Hello all,
Great question and answers. I am a firm believer in the 20% rule. Mainly because of the reduced risk and the better interest rates you get. Once the payment is too high then a landlord has to depend on more units being rented out to cover the expenses. I own a 16 unit complex that I need to have 8 units rented out to make all the bills. The rest is mine.