Author Topic: what % of your assets should you spend on a down payment for a rental property?  (Read 330 times)


  • 5 O'Clock Shadow
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I'm looking to buy a property in a MCOL city (Chicago) to owner-occupy. I've made the "mistake" of renting a pretty nice apartment with two roommates the last four years, and am realizing that in order to get a 3 or 4 flat that doesn't feel like a big step down in quality or location, I might need to spend significantly more on the down payment than I was expecting and hoping to. To be clear, there are certainly cheaper apartments out there, but I have a bunch of wants (maybe needs) that are pushing the price up.

As a specific example, I just saw a 4-flat with the following characteristics:
Listed price: $1.4M
Gross Rents: $10,500
Cap rate: 6ish percent
Deferred maintenance notes: needs new roof and furnaces soon (my real estate agent estimated these as $40K)

The conforming loan limit for a 4-flat results in a max purchase price of $1.318M, so if I understand correctly, I could only buy this property at the listed price if I do a jumbo loan which based on the lenders I've talked to so far, means 25% down. That's $350K. My net worth right now is approaching $700K, so we're talking 50% of my assets.

On the one hand, that number feels high to me (both the dollar amount and the percentage). I came into this process hoping to spend somewhere around $100K down, but over time, I've accepted needing to spend more as I've seen how far money goes in this market. I had just gotten comfortable with the idea of spending around 30% of net worth before I saw this property, and I'm not sure it's a good idea to put another 20% in. Nearly all of my remaining assets after the down payment are in retirement accounts (though a lot of it is after-tax contributions that should be withdrawable any time).

On the other hand, it feels like this is a pretty good investment and substantial diversification might be healthy, since I'm otherwise all-in on index funds. The cash-on-cash return is worse than equity returns, but it's not insubstantial, and after adding in tax benefits, principal paydown, appreciation, etc., the ROI is pretty good, even if some of it isn't liquid.

Additionally, the big gap between my income ($230K) and spending ($30K) means that my net worth is increasing by a huge amount every year. So the down payment here probably represents a 1-2 years of working, which doesn't seem bad at all. Even if 50% allocation in real estate is scary at the beginning, it won't be 50% for very long.

But, that's assuming that I keep working, don't lose my job, etc. I don't plan to retire imminently, but I am getting to a place where FIRE is not too far away. While the 4-flat gives me a place to live, maybe I'll regret tying up so much money in the property prior to giving up my W2 job. It might force me into a OMY situation.

Financial Samurai has an article on this at His numbers don't go all the way to 50%, but he does have allocations at 45% for the first home purchase, so it's in the ballpark.

I'm just curious to hear others' takes on this. What percentage of your net worth was your first real estate purchase? Does this seem like it's overcommitting or does it feel reasonable?


  • Bristles
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Hi OP,

What is your goal here?

You are going from renting a single apartment with roommates to buying a 4 unit. That is a big jump and at a huuuuuuuge cost.

It's unclear if you want to move into a comparable home as yours now or you want to FIRE through a 4 unit?

I've done something similar to what you are doing, but my goal was always FIRE through multis. I also do all the work myself. You'd need to decide what your goal here is and then post a full case study on this property.

Best of luck!


  • Stubble
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  • Posts: 247
Chicago is a world class city, huge financial hub, lots of history, the bean.   Great place to park your money in real estate.  A big downside is those property taxes are high (at least you get to pass it off to the tenants) and some cold a$$ winters.

With your income, putting 50% of your NW in your first property is nothing.  My first property I put 100% of my NW in it, why? because I was just starting out and the only money I had was the down payment my wife and I saved up. 

The biggest risk you run is your time.  Do you want to be a LL?  You've got a solid income, super low spending.  You could pile all that money into the vtsax for the next 10 years and probably come out just fine and never have to answer a text about not being able to pay rent, the tub is backed up, the water heater is leaking, i have rats in the crawlspace, the neighbors are pieces of sh1t, etc etc etc...  (those are all my real world examples btw, with many more if you want to hear about em)

As for the mortgage, even if you can get it for less down, i'd suggest putting 25% down regardless.  It gets you the best rates and you won't miss the additional 5%.

As for the prop you posted, deferred maintenance is probably going to be a lot more than just the roof and furnace, plumbing is probably going to be near the end, bet a lot of electrical could use some updating too.  Hopefully the kitchens and baths are good enough, but if they need updating to the modern standard look to spend even more $$$.


  • Handlebar Stache
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One of my really good friends has flipped about 40-50 houses in the Chicago suburbs for the past 20 years. Oldest house was built in the 1970's. He bought his first flip in the city 4 years ago. It was a 2-flat and about 100 years old. he kept it as a rental. His initial rehab was 50K and 2 years with himself doing most of the work. He spent 100K and it took him 3 years. He couldn't believe how much more work it was for an older building. I would plan for that.

I would personally be more likely to go from an apartment to a 2-flat. Live at the 2-flat, make mistakes and learn from it. Then 3-5 years later go for the 4-flat.


  • 5 O'Clock Shadow
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Thanks for the responses all. A couple thoughts/clarifications:

- an official statement of my goal is something like: "to buy a property that will 1) be a good investment, 2) let me try out landlording and multi-unit ownership, and 3) be a place I am happy to live in for at least 3-5 years." To elaborate on the last point, I don't want it to feel like a big step down from my current place (3BR/3BA, 2000+ square feet, steps from public transit. Shared with roommates, but still, it's awesome. I don't need 3BR for myself obviously, but I don't want go to a place that feels cramped, falling apart, etc). So I don't need to FIRE from multi-units if I don't like being a landlord that much, then I'll probably never buy another multi, live somewhere else and get a property manager, and consider the whole thing a useful but failed experiment.

To that end, clarkfan1979's thought about starting smaller with a 2-flat makes sense, because it feels like it fulfills all of the criteria above, but I do notice that the 3 and 4-flats tend to be better investments. Still, it might be worth accepting a slightly worse return for a trial period. On the flip side, my dad has owned several multi-units so I have some tangential exposure to the kinds of issues that come up, plus an expert nearby who can help me with problems.

- I'm looking for more general advice vs. a specific property analysis. I provided some of the context just so that people had something to picture, but this isn't the only property I'm considering. I was more curious just to hear how much is too much/overextending when it comes to real estate and your responses have helped me think more about that.

FWIW, my real estate agent and I have toured the property, which informed the $40K figure, so it might be a bit off but not terribly off. It was gut rehabbed 17 years ago and parts updated 2 years ago, so while there are always surprises, there's a bit of a limit of how bad (or old or not up to code, etc.) it will be.


  • Bristles
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A 2 second Chicago redfin search shows that there are 1092 multi buildings in Chicago under 1 million dollars. In contrast, there are only 67 multi buildings above 1.5 million. Sounds like you are buying the most expensive house on the block. I don't know anything about CHI real estate, but I'm guessing you are trying to find a really fancy one so that your unit will be comparable to your current living situation. This makes no sense as you do not plan to live here for long. You should be focused on the best CAP rate.

Also a true 6 cap rate building in a major city/desireable location would be gobbled up before you could get your hands on it, so there's most likely something you are missing.

It sounds like you have a good thing going and it doesn't sound like you want to move. You can always buy a multi and not move in. This sounds like a better fit for you.

Best of luck!