Realty Pupil - Secrets of Real Estate

Real Estate Agents often encourage their clients to put as much money down as they can. Lenders do the same. They rarely explain that this is often NOT in your best interest, particularly as a smart real estate buyer.

I often encourage people to at least explore the option of 100% financing, which angers some readers. I do so because, at least in my case, putting down a large down payment on an investment property would prevent me from purchasing other properties and thus utilizing leverage to allow me to own multiple profitable properties with relatively little cash tied up.

For example, if I purchased a $150,000 home here in Utah, with 20% down, I would need $30,000 cash. This same $30,000 cash could be utilized to cover the closing costs and renovations of three 0% down properties. From an investor’s point of view, it seems stupid to put anything down.

The same seems to apply to even those who are not investing. Given generous tax benefits of paying a mortgage, and now that PMI is tax deductible, a low down payment has become increasingly attractive.

There are trade-offs of course, in higher interest rates on loans, and often it can be more difficult to find a mortgage broker who is able to offer a ‘good’ low down payment loan. If you’re finding it impossible to achieve, you may benefit from paying 20% down, and then using a HELOC to withdraw that 20% and invest it elsewhere. The currently high interest rates on a HELOC may or may not make that an attractive option.

‘Safe’ personalities will warn of course, that interest payments are guaranteed, whereas investing your down payment elsewhere has no such guaranteed return. Investing money elsewhere instead of putting it down can be risky.

What few seem to realize however, is that keeping your cash in a home can hold risks as well. If you were to face foreclosure and the bank seized the home, then that equity is lost. If a disaster that you didn’t have insurance for destroyed the home, the equity would be lost. If you were sued and lost the home, the equity would be lost. If a rainy day comes along and you need some cash (lost a job, a divorce, etc) you’re going to prefer having that cash liquid over the trouble of trying to cash out your equity with a refinance.

With rates of return of 5%+ at most online banks, keeping the money liquid can conceivably break even vs. putting it as a down payment.

One truth to always keep in mind however, is that if you’re prone to waste that money in other ways, using it as a down payment might not be that bad of an idea.

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