My friend, Corey, recently asked me the following question:

Q: Tom, I was wondering if there is a formula or rule of thumb that you use in order to figure out how much of a down payment should be applied when buying rental property?

A: Corey, I'm a big believer in cash flow. So, I only want to buy real estate rentals that will produce positive cash flow. Of course, you can always produce positive cash flow from any real estate if you put enough down of your own money. I have a client whose retirement is from several condos that they own outright (no bank loan). Of course, this doesn't produce the highest overall returns.

In order to produce the highest returns, you want the most leverage. So here is what I do. I look at what would my downpayment have to be in order to create some positive cash flow. Then, I calculate what my overall return will be, including cash flow and appreciation (and tax benefits, of course). If that return matches the criteria I have set up in my wealth strategy, then I buy the property. If not, I pass on the property.

So once again, it's all about your wealth strategy. For more about creating your personal wealth strategy, call us toll-free at 866.467.5809 or send an email to cs@provisionwealth.com.

Warmest regards,

Tom