Is It Really Necessary to Make a Down Payment?
Wow — that’s a loaded question, especially coming from a guy known to the readers of this blog as the creative finance, no-money-down finance aficionado…
It is true that everything I’ve ever bought had been 100% financed with OPM. My experience leads me to believe, therefore, that down-payments are not necessary, and I’ve been rather vocal with this in the past. I’ve also on occasion asserted that making down payments is rather not smart, aside for being unnecessary.
All of this might lead you to believe that I am against down payments at all times and in all transactions. This is not entirely true, and today I’d like to add some color to this conversation.
3 Reasons People Make Down Payments
There are basically 3 driving pieces of rationale which necessitate down payments in most people’s minds:
1.Lender Requires It
Sure, any conventional — and even not so conventional — lender requires a down payment.
So…? If they required you to jump off a roof, would you do that, too?
Listen — they require a down payment, but does it have to be your money necessarily? Can this be your partner’s money? Can this be a loan of some sort?
While this argument is fraught with caveats, such as banks DSCR requirements and appetite for your proposed type of asset purchase — and you may need to have an established relationship with the bank — a down payment requirement can potentially be fulfilled in a multitude of ways which alleviate the need for you personally to put up collateral.
I am not saying I don’t provide down payments — only that it’s never my money.
2.Insufficient Cash Flow
If I experience some semblance of understanding toward the latter, I feel that this reason to make a down payment is completely nuts. And yet, I see this all the time — even on BiggerPockets!
Someone in the forums would present us with a breakdown of the numbers for a deal, and people comment how it’s not a deal at all because there’s insufficient cash flow. Often, unfortunately, some fool very seriously suggests that buyer could put more money down to free up some additional cash flow…
Wow — is this the dumbest thing you ever heard? Real estate investors worth anything NEVER BUY CASH FLOW — amateurs do that. We create cash flow!
Yep, the market can shift on a dime and you could sustain a loss of equity, and therefore it’s a good idea to buy-down your spread…
Or you could just be smarter and buy below intrinsic valuation, with further opportunity to push the valuation via value add. And if you are not sure what I just said, then the best thing for you to do is not to buy property, but educate yourself.
What follows is the simple reality that if the deal is good enough without a down payment, but you still want to or need to make one, then by all means do it.
But analyze the deal as though it were 100% financed, and please make sure that it stands up to the minimum threshold requirement relative to both equity and cash flow.