Down Payment

A down payment is the part of the purchase price paid in cash rather than borrowed. On investment property it is typically 20 to 25% of price. It is the largest component of cash invested, the denominator of cash on cash return, and the main lever an investor controls over that return.

On a $250,000 rental, 25% down is $62,500. Add closing costs and upfront repairs and total cash invested is about $75,000. A smaller down payment means a larger loan, a larger payment, less cash flow and a smaller denominator; a larger one means the reverse.

Which direction helps depends on the loan's cost against the property's yield. When the cap rate is above the mortgage constant, less down raises the return. When it is below, as it is for most properties at 7% rates, more down raises the return and less down lowers it. Lenders set the floor at 20 to 25%; the ratio between cap rate and loan cost sets whether you should go higher.

Further reading: Down Payment on Wikipedia.