Years ago, when I communicated with Warren Buffet, he told me – I'm never putting down more than 20% – or words to that effect. Now, this is a guy who can afford to put down pretty much any amount of down payment and even afford to buy any property outright in cash. However, this man, famous for his financial acumen is also known for his fiscal prudence. He is of the view that when buying property the down payment should be low. This is a view I second, and I explain why in this episode of my Investing for Busy People podcast.
As an experienced property investor, one of the questions I am asked most frequently is about the initial down payment: small or large? To this, my answer is very simple: your down payment should be low. In fact, I would go with the Fannie Mae minimum! And why do I recommend this?
Well, I believe that the 30-year fixed rate loan that Americans have the benefit of, is a gift. It can be life changing and this is an option that a lot of people in other countries simply don’t have. This sort of loan is also very beneficial in the way that it lets a property owner take advantage of higher inflation rates, as I explain in my podcast.
As an investor, your most precious resource is the cash reserve you have – a resource that you want to use sparingly and wisely. If you decide to pay a higher percentage of down payment, say 30%, you are actually squandering that most vital resource of yours. A lower down payment will actually translate into a higher buying ability over time. That’s an early retirement opportunity right there! If, for instance, you can buy ten homes making a larger down payment, you will be able to buy 14 homes making a smaller down payment. I explain this in detail in my podcast.
My point is that the 30-year fix rate loan is a gift – one that could be life changing for the smart investor. A smaller down payment is a smart use of your cash resources and it makes a whole lot of sense over the long term financial scenario. It means that you're putting your money to work for you; ensuring more effective and better wealth creation for yourself. Check out this episode of my podcast to know all about down payments and why the Fannie Mae minimum makes so much sense.