The purpose of an investment property is to generate income or make a profit, whether it be through rental properties, fix-and-flip properties, or other types of investment projects.
Your down payment will reflect several aspects of your real estate investment and financial situation to your lender.
Investing in rental property can be an excellent way to generate passive income and build long-term wealth. However, coming up with the down payment for an investment property loan can be a major hurdle for many real estate investors Just how much money do you need to put down to purchase a rental property?
The down payment amount required depends on several factors, including the type of loan, your credit score, debt-to-income ratio, and more. In this comprehensive guide, we’ll break down everything you need to know about down payments on investment property loans.
Typical Down Payment Requirements
Most lenders require a down payment of 20-25% for an investment property loan. This means if you purchase a $500,000 rental property, you’ll need to put down $100,000-$125,000 The large down payment helps mitigate the lender’s risk since investment loans are riskier than primary residence mortgages.
However, certain loan programs allow down payments as low as 10%, 5%, or even 3.5% for investment properties. We’ll explore these options in more detail later. First, let’s look at the most common loan types and their typical requirements:
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Conventional loans – Require 20-25% down payment on investment properties,
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FHA loans – Allow down payments as low as 3.5% if you live in one unit of a multi-family property.
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VA loans – Offer 0% down payment options for eligible military members.
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USDA loans – Require 0% down for properties in designated rural areas.
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SBA 504 loans – Down payments as low as 10% for commercial real estate purchases.
As you can see, certain government-backed and specialty loan programs provide more flexible down payment options for investors. Next, let’s discuss strategies for putting down less than 20%.
How to Buy a Rental Property with 10% Down
If you don’t have 20-25% to put down, don’t sweat it. Here are some strategies investors use to buy rental properties with 10% down or less:
House Hacking
House hacking involves buying a multi-family property, living in one unit, and renting the others. Many lenders allow down payments as low as 3.5% for owner-occupied properties. Rental income can help cover your mortgage payment each month.
HomeReady & Home Possible Loans
These programs from Fannie Mae and Freddie Mac enable down payments as low as 3% for qualifying low-to-moderate income borrowers. You must live in the property for at least one year.
FHA, VA & USDA Loans
As mentioned, government programs like FHA, VA, and USDA allow down payments of 3.5% or 0% if you occupy the property. These are great options for first-time investors.
Down Payment Assistance Programs
State and local programs provide grants and loans to cover down payments, closing costs, or rehab expenses. Income limits apply, so research options in your area.
Seller Financing
Some sellers may be willing to finance up to 90% of the purchase price directly so you only need 10% down. Make sure the terms work for you.
Hard Money Loans
Hard money lenders provide loans for short terms based on the property value rather than your income or credit. Down payments of 10-25% are common.
Home Equity Loan/Line of Credit
If you have sufficient equity in your primary residence, a home equity loan or HELOC can provide funds for a rental property down payment.
As you can see, there are many ways to invest in real estate without 20% down once you get creative and explore specialty financing programs.
What Goes Into the Down Payment?
When budgeting for your rental property purchase, the down payment is just one piece of the puzzle. You’ll also need to factor in:
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Closing costs – Usually 2-5% of the purchase price. Includes origination fees, appraisal, inspections, etc.
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Initial repairs and maintenance – Budget 1-3% of the purchase price for immediate fixes needed before renting.
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Emergency fund – It’s wise to have 3-6 months of mortgage payments saved as a reserve fund.
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Property insurance – Shop around for the best landlord insurance quote.
Total move-in costs can reach 10% or more of the purchase price. Keep this in mind when deciding how much to put down. You’ll need sufficient funds to cover all these upfront expenses.
Which Loan Programs Allow Low Down Payments?
Now let’s take a closer look at some of the top low down payment options for investment property loans:
FHA Loans
FHA loans only require a 3.5% down payment and allow credit scores as low as 580. The catch is you must occupy the property for at least one year if it has multiple units.
VA Loans
If you served in the military, VA loans offer 0% down and no PMI. Occupancy, credit score, and income requirements apply. Only eligible on 1-4 unit properties.
USDA Loans
Similar to VA loans, USDA rural housing loans don’t require a down payment or PMI. Credit scores of 640+ and income limits apply. Only available in designated rural areas.
HomeReady & Home Possible
These programs from Fannie Mae and Freddie Mac enable down payments as low as 3% for qualifying borrowers, along with flexible credit and income requirements.
Down Payment Assistance Programs
First-time homebuyers may qualify for down payment grants and loans through state housing agencies, nonprofits, or employers. Amounts range from $1,000-$15,000 typically.
Seller Financing
Ask the seller to finance up to 90% of the purchase price directly. This works best on multi-family properties when credit or income is a challenge. Make sure the terms are favorable.
Hard Money Loans
Hard money loans are asset-based loans with faster approvals, but higher rates and fees. Investors with poor credit or income may still qualify with a down payment of 10-25%.
What Factor Most Into Loan Approval?
While the down payment is important, the lender will look at your entire financial profile to assess risk, including:
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Credit score – Most programs require a minimum score of 620-640. The higher your score, the better.
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Debt-to-income ratio – Your total monthly debt payments, including the new mortgage, should not exceed 43-45% of gross monthly income.
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Income – Document 2 years of stable income from employment, self-employment, or other sources.
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Assets – Lenders want to see you have adequate cash reserves post-closing – often 3-6 months of mortgage payments.
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Property type – Single family homes are the easiest to finance. Small multifamily properties may also work.
Bringing a larger down payment to the table can help compensate if you fall short in one of these other areas. But overall, the lender will evaluate your complete ability to repay the loan.
Tips for Securing Investment Property Financing
Here are a few tips to boost your chances of getting approved for the lowest down payment possible:
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Shop multiple lenders to compare rates and requirements. Mortgage brokers can be helpful here.
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Look into specialty lenders like portfolio lenders that offer programs not available elsewhere.
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Consider using a business entity like an LLC to purchase the property if your personal credit needs work.
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Partnering with others via crowdfunding or syndication can pool more cash for the down payment.
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Work on improving your credit score and reducing debts ahead of time if possible.
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Be ready to thoroughly document income, assets, and cash reserves.
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Prepare a detailed business plan demonstrating how you’ll manage the property profitably.
With proper preparation and persistence, investors can secure financing for a rental property even with less than 20% down through leveraging specialized loan programs, grants, partnerships, and alternative lenders. Determine the optimal loan amount and terms for your financial situation and timeline. If you have the skills to effectively operate the property, there are plenty of financing options available with the right down payment strategy.
How down payments work with investment properties
The primary purpose of a down payment is to reduce the amount of money that needs to be borrowed. It serves as an initial investment or upfront payment from the investor.
The down payment amount is expressed as a percentage of the total purchase price.
For example, a buyer might be required to make a 20% down payment on a property valued at $300,000, which would amount to $60,000.
From the lender’s perspective, a down payment mitigates risk. When buyers invest their own money upfront, they have a financial stake in the property—making them less likely to default on the loan.
Similarly to traditional lenders and loan types, an investment loan’s minimum down payment requirement depends on multiple factors.
Factors that influence the minimum down payment amount
Let’s look at the down payment factors for investment property loans.
How to Buy a Rental Property with 5% Down (Sneaky Tactic)
FAQ
Can I put less than 20% down on an investment property?
How much should I put down on an investment property?
Can I use a personal loan as a down payment on an investment property?
What is the minimum down payment for an investment property in Texas?
How much is a down payment for investment property?
Key takeaways A down payment for investment property generally ranges from 15% to 25%. House hacking is a technique used by some real estate investors to reduce the down payment amount to as little as 3.5%. Loans backed by Fannie Mae and Freddie Mac are two options for financing an investment property.
Can you buy an investment property with a 0% down payment?
A sizable down payment is standard when you take out investment property loans. But you may be able to buy an investment property with as little as 10%, 3.5%, or even 0% down. Loan programs like HomeReady and Home Possible make purchasing an investment property with 10% down or less a possibility.
What is the minimum down payment for an investment property loan?
15% down payment minimum: Most lenders expect a down payment of at least 15% on an investment property loan. But the exact down payment requirement will vary based on the risk tied to the loan, your experience in the industry, your income, and other financial factors.
Can you borrow a down payment on an investment property?
Whether from a HELOC, home equity loan, personal loan, or private loan from friends or family, you can borrow the down payment on an investment property. At least when you take out a portfolio loan from a private lender — conventional lenders don’t allow any part of the down payment to be borrowed.