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How's The MarketInterested in buying a rental property?  Perhaps you were thinking that a 20% rental property down payment would do the trick to get you started as a real estate investor?  That may work in some places. In most of the U.S., though, you’ll need 30% down to be “cash flow neutral”, meaning that you aren’t losing money each month.  In pricey Silicon Valley, though, often it takes more than a 40% down payment on an investment property just to break even.

Today a friend and past client asked me exactly this question.  The investment property in mind, a townhouse,  would pull in a monthly rent of about $2600 to $2800 when occupied. (Remember, you have to also factor in at least some vacancy rate.)  The list price for this townhouse is about $650,000. (Side note:  with a condo or townhouse,  insurance coverage is probably going to be a lot less costly than with a single family home.  The estimates below are for a townhome.)

Where do you think the cash flow neutral or break even point would be in terms of the down payment?    That question is today’s case study.  Have a look at the various scenarios of  20% down, 30% down,40% down and 50% down:

 

Investment property down payment needed to be cash flow neutral

 

If my calculations are correct, you really need to put about 50% down to buy this particular Santa Clara County townhome and have it support itself.

Is that a good deal?  Not really. At least not if your main focus is cash flow.

There are other places in the country where you can put a lot less down and break even or have a positive cash flow.

Of course, cash flow is one motivator.  Another, though, is appreciation.  Depending on your own goals, you may be far more interested in appreciation than cash flow.  If that’s the case,  Silicon Valley may be exactly what  you’re looking for as an investment buyer.  Those places where the down payment can be smaller may not have the same upside potential with appreciation as we have here in the San Jose area, or the San Francisco Bay Area as a whole.

Interested in becoming a real estate investor? Have a good down payment saved?  Please call or email me and we can chat.  If Silicon Valley isn’t the right place for you to make your real estate investment, I can introduce you to wonderful Realtors in other areas where the numbers may be more favorable.

 

See also: Buy a Los Gatos home or real estate investment property