We’re doing a different kind of deal analysis in where we focus on how a different down payment percent can drastically change long term outcomes. We’re comparing down payments of 15%, 20%, and 25% on the same property, examining not only the initial cash outlay, but the affects on returns over a long period of time.

Property Overview: House w/ ADU

The property we are looking at is in unincorporated Adams County just north of Denver.  It is a three bedroom one bathroom single family home with a fenced yard and a two bedroom one bathroom Accessory Dwelling Unit (ADU) on the back of the lot.  The purchase price of the home is $475K. 

After speaking with the property manager, I found out that one family rents out both units and is going to be there for a long time.  The units are not separately metered, and the tenants of both units pay all utilities amongst themselves.  Using this information, I can make my estimates for vacancy and repairs and will use the same data operating data for all three down payment scenarios. 

I used the Rental Property spreadsheet to run this analysis.

Option 1: 15% Down Payment

Because this is a single family home, putting down 15% is an option.  If this were a condo or multifamily building, I would be required to put down at least 25%. 

Two main things come up with 15% down: the interest rate is higher and I will be required to pay Private Mortgage Insurance (PMI).  My acquisition costs will be around $16K.  About $2.5K of this includes appraisal and closing costs, but the rest comes from the interest rate buy down of 3.5%.  The down payment is just over $71K. 

Option 2: 20% Down Payment

With 20% down, my acquisition costs are lowered because my interest rate buy down drops to 3%.  Also, I no longer need to pay PMI, and my interest rate will be lower.  However, my down payment goes up to $95K. 

Option 3: 25% Down Payment

With 25% down, my down payment jumps to around $119K, but my acquisition costs are only $12K because my interest rate buy down is lower.  There is no PMI, and my interest rate is the lowest of the three options. 

Comparison of Returns

When I compare my returns for all three options, I can see how these differences will play out in the long term.  This is same property in every scenario, so appreciation and tax benefits are identical regardless of financing options. 

When I look at cash flow, the 15% down payment option is around break even at negative $89 per year, and the 25% option is positive $5.4K per year. 

However, my total return for 15% down is 39.3% versus only 30% for 25% down.  This is because the estimated appreciation is the same for all options, but I’m putting in significantly less cash at 15% down.  When I divide appreciation by my all in cash, the return will be higher with less down. 

What’s the Best Down Payment Option?

The decision for how much to put down comes down to risk tolerance.  A higher down payment will result in more cash flow, but it means putting in a significantly greater amount of money.  In this scenario, an extra $5.4K per year isn’t going to affect my long term plans.  And with only 15% down, I would have an extra $40K in cash to keep in the bank or use to invest in my next property.  Otherwise, it would take eight years to get my cash back with the 25% down option. 

Conclusion

If you have any questions about these options or want us to help you run numbers for your own property, reach out to us.