which way? down payment or save cash

a newbie here. I’m interested in buying a rental investment property. My brother started his investment 2 years ago and he’s doing pretty good. He has recommended to take the equity loan as much as I can from my first house and make smallest possible down payment on the 2nd house. His logic is that if I get comfortable with being a landlord, I will have extra liquid cash in the bank to buy 3rd house for rental. He says if I use up the cash, I will have to take another loan down the road.

So here is the data:

  • equity on the 1st house is about 100k
  • I’m looking at buying the 2nd house for around 350K
  • I have good credit score around 790
  • I have saving of $40,000

Based on the calculation, I will break even with my cash flow if I make 25% down payment on the 2nd house. If I do 80/15/5, I will deplete ~ $400 every month, but I’ll have over 100k usable cash.

I’m not sure whether to make big down payment to minimize the monthly cash bleeding or keep the cash as much as I can in the bank for 3rd house. Or meet some where in the middle?

I’d appreciate any thoughts/feedback.

Don’t buy anything with a negative cashflow. Breakeven isn’t good enough either, at least not for me. You want positive cashflow.

That said, putting down money to get positive cashflow is a blind. You really don’t have positive cashflow because you had to buy the cashflow. The property needs to cashflow with 100% or more financing.

My suggestion is to learn how to find properties at a discount and then look into how best to finance them.

Oh, if your credit score is 790, then you shouldn’t have any problem borrowing 100% or more on any of your deals. Find a good, preferrably referred, mortgage broker that deals with investor loans and leave your savings and equity line alone.


Howdy Nextsean:

I agree with Roger. Keep your home as debt free as possible. With a credit score like that you can borrow 100% on investment deals all day long. I would only buy distressed deals and rehab them. I am buying $20,000 houses that rent for $500. I am paying 12% interest and still cash flowing like crazy. I am also buying a 30,000 foot office warehouse for $165,000 that will appraise at over $600,000 with about $175,000 in rehab. It will rent for $7500 per month. My score of 500 will keep my rates at 14% using hard money and I am having to pay 36% for the equity money of $40,000 but look at the cash flow and equity I will have. No way would I borrow $350,000 just to break even or lose money every month. There are better deals even if you partner up with someone and only get half a great deal is better than 100% of a retail deal.

thanks for the feedback…

OK obviusly, I have a lot of learning to do. Can you tell me why investment loan would be better than going with the equity loan? I would think equity loan would have better interest rate than former? I don’t know anything about investment loan and how its interest rates are. I will have to do some research. If you know pros and cons of investment loan vs. equity loan, I’d appreciate the comment.

One more question… How are you able to buy 20k houses? Are they foreclosed houses? That’s another area I don’t know too much about. And what’s rehab? Is that same as flipping?

Man, I sound like a fish out of the water!

$100,000.00 divided by $400.00 negative cash flow!!!

So that 100k would only cover you for 20.83 years Hummm

What state are you looking to invest?

What is the avarage price of a home?

Yeah, I did that calculation as well. But some of that 100k would be used for 3rd house down the road. But I was thinking that equity loan and the saving would last me at least 10+ years if the cashflow stays at negative $400.

I’m looking in Seattle, Washington. Two reasons, the rental market is better in seattle area and I want my first rental property to be somewhat close to where I live (Kenmore). I would venture to say the avg is around 400k if there’s such thing as avs house in seattle.

Any other thoughts or advise?

Am I going down the wrong path to make profit on the house appreciation instead of monthly rental positive cashflow? I don’t think positive cashflow is possible with my situation.

Any comments or feedback are appreciated!


      Wanted to let you know I am responding this is just a long response give me a few!!

There is a post in the landlord forum called living solely on rentals this turned out to be one of the great threads!

If you are good with money which it sounds like you are by your credit score and your ideas to keep re-investing the cash I say do it!

here is one thing that I did when I started and still do today (well not today it is Sunday and banks are closed) I took out the cash and used it to buy houses cash! Then I would take that deed to the bank and get a HELOC (home Equity line of credit) and use that to buy the next free and clear then I would use that HELOC to buy another and get a Heloc on that one then use that HELOC to buy another and so on and so on and so on! CASH IS KING to finding great deals people loved it when you can say HEY IF I CAN CLOSE AS QUICK AS IT TAKES FOR THE TITLE COMPANY TO GET THE PAPERWORK READY SO THREE DAYS TOPS WHAT IS THAT PRICE!!! The price drops quick! This also makes for some great wholesale deals! There again you can make great cash! The thing to also keep in mind is I am the highest paid person on my payroll! Yes I am paid a salary by my own business! All profits over that I use to pay off a second mortgage every month! so I am paying off the highest interest loans as fast as possible I can usualy pay one off a month creating more cash flow! I also am proud to announce I only have 4 houses that are still financed at over 80%! most of them I just bought and got a great rate on the second mortgage! So I pulled cash to create cash! There are a ton of things you can do when you have 20% I could honestly sell every property I own in two weeks and have a better cash flow per month then I do by owning them! On the other hand why sell when they are estimating an increse in the property of 40% over the next four years… There is no point in selling now. I will sell then no questions asked!

Hope this helped and sorry to ramble on like that!! Robb

Howdy Nextsean:

Sorry I missed your earlier questions. The duplex I got was for $11,900 and the house was $16,500. They both needed some work. They were VA and FDIC foreclosures. They are located in a depressed area as well but rented really fast to a nice professional lady.

The rate for an equity loan is cheaper. What I was saying is not to risk your home for some rent houses. What happens if the bubble bursts and you lose your job and your rent houses and your home too. Too much to risk for most conservative investors. Trust me I am not conservative but I try to help others be that way.




Thanks for sharing your past experience. I’m trying to do this simliar to what you’ve been doing, minus big cash and experience.

The main reason why I want to take as much equity loan as possible is so that if I’m comfortable with 2nd house and ready for the next one, I would not have to mess around with taking another loan. I would have the cash sitting in the bank. That should save me some money. Or is it not enough to offset the interest I’d be paying on that equity loan?

The issue with buying an house with cash is that it’s impossible to buy anything decent in Seattle for anything less than 300K.


Thanks for the concern. Believe me I have been really conservative when it comes to finance. I have never had negative cashflow in my life and this is a big change for me. I am worried about the bubble burst as well. I have a very stable job here in Seattle and I think I’m covered as far as generating steady paycheck.

I feel like I need some re-assurance from you experienced folks and do a sanity check that I’m not being crazy. I have to admit I’m pretty nervous and scared.