Down payments and healthy competition
Healthy competition has a way of pushing us to excel. For example, I always run faster if I’m with a friend versus running along. Well, healthy competition in the market has the same sort of effect. One place this is clearly visible is in the real estate market. Consider a bidding war and what this means for the seller; you have five people who are all competing or bidding for the same property and that competition drives the selling price up drastically.
Well this same idea can be seen in other facets of the real estate arena as well, namely, when deciding what amount of money to put down on a property. There are all sorts of beliefs when it comes to this topic, and many of the different notions have validity in their own way. Some will say to put no money down and take the 100% financing route while others recommend putting anywhere from 5 to 20% down.
I recommend making a 10% down payment. Any investment property loan requiring less than this percentage is called a “niche” loan, and fewer lenders offer such programs. This means less competition between lenders and so the costs and interest rates are relatively higher. These borrowers are considered more of a risk after all, and as a result, their cash flow and return will suffer.
But most lenders do offer a 10% down investment property loan. There is more competition between lenders over borrowers who can make this down payment amount, and that equals better loan programs with lower interest rates. Isn’t healthy competition great? A borrower who can offer 10% down appears less risky to the lender, and, in light of the subprime lending meltdown, lenders looking for low-risk borrowers more than ever. Monthly payments for such borrowers will be lower, which makes for a greater return and cash flow.
That’s why it’s so important to seek out healthy competition in real estate; it benefits the borrower.