I recently worked with an investor who was buying a $388,000 investment property and had approximately $100,000 in cash available. The question wasn't complicated on the surface: how much should they put down?
But when we ran the numbers, the answer wasn't obvious — and I think the way we approached it is useful for any investor thinking about capital allocation.
The Two Scenarios
We compared 30% down and 20% down, both at a 4.95% interest rate with a $7,000 rehab budget.
Scenario 1: 30% Down
- Down payment: $116,400
- Total capital: $128,900
- Projected monthly cash flow: +$19
- DSCR: 1.01
- Cash-on-Cash return: 0.17%
- Modeled combined Year-1 ROI: 13.54%
Scenario 2: 20% Down
- Down payment: $77,600
- Total capital: $90,100
- Projected monthly cash flow: -$188
- DSCR: 0.89
- Cash-on-Cash return: -2.51%
- Modeled combined Year-1 ROI: 17.26%
Operating expenses were identical in both scenarios: property taxes $162/month, insurance $50, maintenance reserve $60, property management $140, capital expenditures $60, other $20. Total: $492/month.
What Does the Additional $38,800 Actually Accomplish?
Putting another $38,800 into the property — going from 20% to 30% down — improved monthly cash flow from -$188 to +$19. That's a $207/month difference, or $2,484/year.
So the real question wasn't "Which option has positive cash flow?" It was: "Is improving cash flow by $207/month worth putting another $38,800 into the property?"
That's a very different question.
Liquidity Has Value
With 20% down, total capital required is approximately $90,100 — leaving some of the investor's available cash outside the property. With 30% down, total capital required jumps to $128,900, meaning additional assets would need to be liquidated.
Once money becomes equity in a property, accessing it again isn't simple. Keeping capital available provides reserves for repairs, vacancy, another investment opportunity, or personal needs.
The Stock Question
The investor also owned stock that could be sold to fund the larger down payment. But selling stock carries potential tax consequences.
Importantly, capital-gains taxes generally apply to the gain above the investor's tax basis — not the entire sale amount. That's something they should work through with their CPA before deciding.
Why I Preferred 20% Down
Based on these numbers, I preferred the 20% down structure — assuming the investor could comfortably handle the projected $188 monthly shortfall and maintain adequate reserves.
The 30% down scenario gets the property to approximately break-even cash flow, but the 1.01 DSCR means there isn't much cushion even after investing the additional capital. It doesn't turn it into a strong cash-flow property — it just makes it nominally positive.
The 20% scenario also produced the higher modeled percentage Year-1 return: 17.26% vs. 13.54%. That comes with greater leverage and risk, but it reflects the math of deploying less capital.
Negative Cash Flow Isn't Automatically Bad
I'm generally looking for positive cash flow when underwriting rental properties. But there are situations where modest negative cash flow can make sense.
An investor might intentionally accept a small monthly contribution in exchange for:
- Preserving liquidity
- Avoiding unnecessary asset sales
- Maintaining reserves
- Controlling the same property with less capital
- Potentially increasing the percentage return on invested capital
That said, a 0.89 DSCR means the property isn't covering its debt service from operations. The investor needs sufficient income and reserves to comfortably absorb that shortfall.
The Bigger Lesson
Real estate investing isn't simply about maximizing cash flow. It's about allocating capital efficiently.
Before increasing a down payment, investors should ask: how much additional cash flow am I actually buying with the additional capital?
In this case, $38,800 of additional capital bought approximately $207/month of cash flow. For this investor, keeping that capital available appeared more valuable than tying it up to make the property's monthly number approximately zero.
That's why we run the numbers before making the decision.
Thinking about buying an investment property in Arizona?
Before you make an offer, I'll provide a professional underwriting analysis so you can understand the property's cash flow, appreciation potential, financing impact, and long-term return. Send me the address, and I'll review it with you
Brian Harris | Investor-Friendly Real Estate Advisor | Dream Source Real Estate
📍 Serving Phoenix, Scottsdale, Glendale, Peoria, Mesa, Chandler & surrounding areas
📞 602-684-0198 📧 [email protected] 🌐 azdreamsource.com
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