Should I put 5% down, even though I have 20%…

Financing, Hard Money Lenders, Private Money
1

I am trying to decide if I should put 5% down, even though I have 20%…

I am a first time home buyer in PA who is getting ready to purchase a $258k house as my primary residence (long term). In 6 to 12 months, I plan on also acquiring an investment property ( fix & flip or get a rental – $200k range) for a monthly cash flow or selling profit. Credit score is 793 with 70k+ income.

If I have about $50k dedicated for real estate investments, what would be the optimal plan for leveraging these finances in order to obtain good interest rate loans, low monthly payments, without tying up my cash long term or taking on high risk.

For my first primary residence, here are the options I’m considering…(assume 5.5% Fixed 30 Year for both) After $10k in improvements, the house will be worth about $280k

Option 1:
Put 5% down ($12, 900)
$1395 mortgage + $155 mortgage insurance = $1550
$37,100 left for other investment property (6% mortgage)
Preserve cash flow and maybe make extra principal payments at some point

Option 2:
Put 10% down ($25,800)
$1320 mortgage + $140 PMI (?) = $1460
I am confident I could cancel PMI within two years when I am 80 LTV ($3800 PMI over 2 years)
Leaves $24,200 for second property down payment

Option 3:
Put 20% down ($51,200)
$1150 mortgage (No PMI!)
Would have to use HELOC to obtain other investment property (7-8%). I’ve read it is dangerous (and sometimes difficult) to use a HELOC for a second property down payment.

With Option 3, putting an extra $38,300 down would yield $400 more cash flow a month than Option 1. (4800 per year). This is like a 12% first year return on that $38,300 - instead of 3% in the bank, etc.

Maybe it is subjective, but I would like to hear your thoughts on these various options if you were in my position?

2

Howdy Jim:

I would try to get even better leverage with zero down or even cash back at the closing. With your credit there is no need to use your cash. Put it somewhere it will earn even more than the 12% or put it in the bank for security. You could loan other investors hard money loans and get 14% plus 5 points or buy notes at a 25% yield plus or a number of other choices. You could also buy another piece of rental property or more. One I just bought for $20,000 is rented for $500 per month.

There are two factors to consider. Leverage and the return you can obtain in other investments. The safety of having a smaller payment is also a consideration. Within 6 months I will have $300K profit on a deal I am doing and am considering paying off my house entirely. But I know I will not because I can do better than the 9% I am paying.

3

If you are planning on just doing “fix & flips” I would go with the 5% down. If you are going to start buying rentals I would put down at least 10%.

Why? Debt-to-income ratios.

What is your DTI with 5% down? 10%? 15%? 20%?

If you only put 5% down and you DTI jumps into subprime land and you start trying to pick up rentals you are going to have to finance using stated products, i.e, higher interest rates.

If you are flipping properties who cares if there is a high interest rate as long as you can afford to hold the property for at least 6 months, and thats where the cash comes in handy.

Just my $0.02

4

I like option# 1 for the investor. If you were not and investor I would go for option # 3. Why tie up 20% of your cash when all is required is 5% . With that 15% difference you can certainly broaden your investment portfolio with other investments that “make cents”

As far as cash on hand goes its better to have and not need than to need and not have.

Just make sure your 5% down property cashflows. If it does not consider a larger down payment, negotiate a lower sales price, or find another property.

dun deel

5

There are options not even listed like an 80/15/5…80% first, 15% second, 5% down and NO PMI.

My suggestion is DO NOT PAY PMI!!! You might just as well flush your money down the toilet for all the good that it will do YOU. PMI only benefits the lender…all it does is lighten your wallet by $150 or so a month – that’s 1/2 a mortgage apyment on a rental property where I’m from!

Keith

6

You need to avoide PMI and put as little down as possible. There are many banks that can get your deal done at 100% financing.

7

How about this:
Put 5% down and use another 5% to buydown your rate and for closing costs. From your posts this leads me to belive that you will still have about 20K liquid.