Smaller Down Payments Mean Higher Returns

When financing your Real Estate Investments, you will want to get as much financing as you can. I buy all my properties with 100% financing by using a combination of regular mortgages and secondary financing. Of course you always want to make sure that your investment has a positive cash flow which is more difficult with higher mortgage payments due to lower down payments. With today’s low rates, it is much easier to have a positive cash flow. The reason you want to have a lower down payment is because your Return On Investment (ROI) will be much higher.

For example, let’s assume you are buying an investment property for $100,000 with a $10,000 down payment. And let’s assume your positive monthly cash flow is $100. This is an annual ROI of 12% ($1,200 / $10,000).

Now assume you only put down $5,000. Assume, also, that the positive cash flow is still $100 per month (ignoring increased mortgage payments because they are easily offset by the mortgage principle pay down). If you are doing Lease Options, you can just make the monthly payment required by the Tenant Buyer higher. Your ROI now is 24% ($1,200 / $5,000).

If you look at appreciation, the results are even more spectacular. Assume the same property increases in value by 5% or $5,000. That is a 50% ROI when your down payment is $10,000 or 100% ROI when your down payment is only $5,000. Since I buy all my investments with 100% financing, my ROI is infinity or basically not measurable.

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