A few times a week I talk to investors planning on putting a large down payment on the purchase of a single-family rental home. The goal is to have a better “cash flow”. It may sound logical – the greater the down payment, the smaller the loan, and hence the monthly payments. However, the foundational piece of buying rental homes in the United States is the “gift” called “the 30-year fixed rate loan”. This loan sounds like a miracle to most foreigners, since neither the monthly payment nor the mortgage balance EVER keeps up with the cost of living around the world, while everything else does.
The magical 30-year fixed rate loan
The 30-year fixed-rate loan is at the heart of life transformation for investors when the homes are held for 10 years or more (preferably over 15). The loan keeps getting eroded by inflation (or CPI– the cost of living), while the home, rent, and everything else keeps requiring more dollars to buy (hence in dollars, their value goes up – even without intrinsic appreciation). The 30-year fixed rate loan starts looking quite puny after 12, 14, 16 years. It may be years before it is paid off, but since it never keeps up with the cost of living, inflation hammers the real value of the loan.
These loans are a great financial gift, with future-changing potential. Why, then, would you want to make the gift smaller? Especially at today’s low rates? The answer is, you don’t. A larger down payment will mean the magical loan will be smaller.
May be wise not to exceed 20% down payment
This is not fully utilizing the power of the fixed-rate loan, and it means the borrower has expended more of their scarcest resource: cash! Even very wealthy people, who can afford to put down a large down payment or buy for cash, choose to put down less money. They do this to leverage their cash with the 30-year fixed-rate loan.
I think that in normal cases, a 20% down payment should not be exceeded. The small additional cash flow due to having a smaller loan is insignificant at the present time. Right now, your main “cash flow” should come from your own earnings (salary). It is later in life during retirement that the rental homes can replace your income.
In cases of big 1031 exchanges, with not enough properties to identify, or in cases of not being able to get the FNMA loan anymore, then larger down payments are merited and that is a different blog post. I still think the down payments should be less, rather than more, in any circumstance. Currently, in our Membership area on our website, we have podcasts and a webinar that discuss loans and cash flow in depth. You can learn more about it at icgre.com/members
Many would-be rental home investors waste years before getting started. Some of the reasons for that are: too busy, fear of the unknown, the all-too-known paralysis of over-analysis, and lack of information. Conversely, the notion that they might never have enough information or money, and need to spend more time researching and studying before they act. Exacerbating this phenomenon, many new investors make what we call “rookie” mistakes when they finally do get going.
The most typical rookie mistake is believing that low-quality homes in bad areas in lesser cities will provide better “cash flow” (foreigners like to call it “yield”). While cash flow may appear to be better ON PAPER for such lesser properties, life doesn’t happen on paper. In real life, these bad properties usually end up wasting even more years of the investor’s time (and also the investor’s money).
Get started on the right foot
There are ways to get started fast (and correctly). They are: buy the right type of property (s), get the right (type) of financing, and use the proper management. Using these simple steps, the new investor can get off to a good start regardless of how much time or knowledge they have.
Remote Control Retirement Riches
On my Public Television special titled “Remote Control Retirement Riches with Adiel Gorel”, which will be airing through the weekend and into early September on Public Television stations across the country (KQED-TV in the San Francisco Bay Area, for example) this coming weekend, August 24th and 25th, I cover these points. Of course, I cover many other important related topics as well.
In the package I have created for the people who pledge to help Public Television, I have included two newly-written books, an extensive video course complete with motion graphics, three booklets, a quiz, and a newsletter. The package also comes with the DVD of the show, as many may miss the showtimes.
One of the booklets I have written Is called “Making it Happen”. It targets the exact barriers preventing an investor from getting started correctly. This booklet also contains a self-quiz defining your readiness.
This booklet, coupled with all the other extensive information, and the PBS Special itself, which hits the important points, should get anyone up an running in no time. I will also happily support any investor, as we have already changed the lives of thousands, and I believe in continuing to change lives for the better.
For a partial list of the Public Television stations’ showtimes, please click here.
Also on the pro side, people are confused as to where money should operate. The knee-jerk
reaction is to have money sit as cash (with close to zero yields). However, when people are scared of stock markets, real estate and (especially) single family homes usually become more interesting as a safe hard asset that produces income, which we tell our clients at ICG as well.
Getting updates from the market teams was fantastic as always. Things change consistently, and to have them there every quarter to let people know what is going on is critical. I have been producing this event for over 20 years now and I still learn every time.
Investors who have been buying older homes from bank foreclosures during the recession are now realizing some of the benefits of buying new homes built this year, in 2015 direct from developers (or minimally a massive renovation – like new). The lower future incidence of repairs, the warranties, the potential developer giveaways–possible only in new home purchases (a builder can give the buyer a covered patio which may be a $6,000 option, but only costs the builder $2,000 to build) and the modern amenities and floor plans are starting to attract more investors.
For more information, you are invited to attend our quarterly ICG Real Estate 1-Day Expo this Saturday. You will not only meet teams from the most relevant markets and see the possibilities for yourself, but there will be expert speakers on important topics such as the new twists in Asset Protection (you must know about this), buying real estate from your Self-Directed IRA, and getting real estate financing for purchases from within your IRA.
There will be information for new investors and established investors on how to move forward powerfully. There will also be lenders to update us as to the ever-improving loan possibilities for investors (domestic and foreign), and lots of great Q&A and networking. The event is near the San Francisco Airport this Saturday, March 7th, from 10 AMinfo@icgre.com or call us at 415-927-7504.You may also register by emailing us at
Do this in 2016. Do this several times. You will be setting up your financial future.
As far as markets, there may not be large appreciation swings in most markets during 2016. In a funny way, the ever-solid Texas is appreciating decently now, but people have some questions about its overall economy.
Oklahoma City with brand-new homes (under 50% of the property tax bite of Texas; it is poised to provide better cash flow on similar rents and home prices – which it has) is a very serious candidate for solid investments.
Get those good single-family homes and finance them with low 30-year fixed-rate loans. Rinse and repeat. You will very likely be quite happy in the future when you look back at what you have done. We will be discussing this in detail, along with market teams and incredible experts, during our next quarterly 1-Day Expo near SFO on Saturday, March 5th. Everyone citing this blog can attend for free with guests. Just email us at firstname.lastname@example.org or call us at 415-927-7504.
Happy New Year!: