How important is 20% down?

[Sullivansoul]

My wife and I are excited about entering the real estate market with cash flow properties. We are currently renting ourselves and so we thought it would be a good idea to purchase a duplex, live in one unit while renting the other out.



We have recently found a duplex that would be a good fit, but we still only have about 10% for a down payment. With interest rates slowly on the rise and the fact that we are spending our own money on renting as we wait should we jump in and purchase? Thoughts?

 

[MatPiche]

If you are going to be living in the house as your primary residence you are able to buy with 5% down. Obviously the bigger the down payment the more equity and cash flow you will receive. Hope I helped! Good luck with the house!!

 

[RobMacdonald]

That's a great way to get started in the world of real estate. You can purchase with 5% down, and most lenders will use the rental amount to offset the mortgage payment. That makes qualifying even easier.



You can live in one unit, and rent the other unit out. Eventually, when you save up some money, you may be able to do this again, and rent out the unit you are living in.



The insurers, CMHC and Genworth, may cap you at some point, but I've had several clients that were successful in doing this a couple of times.



You should review your options as part of a longer term plan. There are number of different directions you could go with this, but is a good way to get started with low equity.



If you have any questions, feel free to contact me direclty.

 

[jseib]

Depending on the location it can be difficult to generate cash flow with less then 20% down. As well in the long term the mortgage insurance cost will eat into your profits.



If possible you would be better off buying something that is a bit worn but just needs cosmetic changes like removing the wall paper, pulling the carpet and refinishing the old hardwood. Maybe a cheap home depot style kitchen.. These properties exist and after you do the upgrades the property value may increase enough that you can take out most of your initial 20% down. This would allow you to avoid the CMHC insurance costs and perhaps even put you in a better negotiating position when buying.

 

[housingrental]

I second Mr. "jseib"'s above post

CMHC could be a great tool in a rapidly rising market or for potentially lower rates on buildings

It should be avoided whenever possible - for a duplex in a market that is not rapidly appreciating often better to wait and save up more $$$$ to avoid the premium you'll pay.