While you may be able to buy your primary home with little or no money down, you’ll typically need to put down at least 15% if you want to purchase a rental property. And with the median cost of a house hovering around $399,000, that comes out to nearly $60,000. This hefty chunk of change is a huge reason why it can be tougher to break into real estate investing than it is to buy a home you’ll live in.
But that doesn’t mean you don’t have options — we’ll cover strategies for raising a large down payment and ways you can side-step that steep minimum requirement.
Investing in rental real estate can be an excellent way to generate passive income and build long-term wealth However, coming up with the down payment is often the biggest obstacle for aspiring real estate investors
Conventional loans typically require a minimum down payment of 15% for single-family investment properties and 25% for small multifamily properties. This translates to $60,000 for the median priced home!
In this comprehensive guide, we’ll cover everything you need to know about down payments for conventional investment property loans including
- Down payment requirements for conventional investment loans
- Strategies for coming up with a large down payment
- Using rental income to reduce your down payment
- Alternatives like low down payment government loans
- Tips for calculating your maximum purchase price
Down Payment Requirements for Conventional Investment Loans
The minimum down payment for a conventional loan depends on whether you are purchasing a single-family home or small multifamily property:
- Single-family homes – 15% minimum down payment. On a $400,000 rental home, that equates to $60,000.
- 2-4 unit properties – 25% minimum down payment. On a $400,000 duplex, you’d need $100,000 down.
You’ll typically need a credit score of at least 700 to qualify for a conventional investment loan with 15% down. With excellent credit and a low debt-to-income ratio, some lenders may approve a 680 credit score.
The 25% down payment requirement for small multifamily properties is non-negotiable
Strategies for Coming Up With a Large Down Payment
Saving up $60,000 or more for a down payment is no easy feat. Here are some strategies to help you reach your real estate investment goals faster:
- Tap home equity – Cash-out refinance or home equity loan/line of credit
- Use retirement funds – Self-directed IRA or 401(k) loan
- Invest with others – Real estate investment group/crowdfunding
- Owner financing – Seller provides financing with minimal down payment
- House hack – Live in one unit of a multifamily to qualify for low down payment loan
- Save over time – Automatically deposit to investment account each month
Getting creative with your down payment can help you break into investment real estate sooner. Just make sure to weigh the costs and risks carefully first.
Using Rental Income to Reduce Down Payment
The great thing about investment properties is that potential rental income can help you qualify. Conventional lenders will allow you to apply 75% of projected rents towards your income.
If you have experience managing properties, you may be able to count all of the rental income. This can significantly reduce the down payment you need.
For example, let’s say you locate a $400,000 rental property with $2,000 in projected monthly rents. You could apply $1,500 per month towards your income for qualification purposes. This added income stream makes it possible to buy the property with just a 10% down payment.
Low Down Payment Government Loans
Conventional loans aren’t your only option. FHA, VA, and USDA loans allow down payments as low as 3.5% on investment properties.
The catch is that you’ll need to live in one of the units as your primary residence for at least 12 months. This “house hacking” strategy lets you enjoy the benefits of homeownership and real estate investing simultaneously.
Here are the down payment requirements for government investment loans:
- FHA – 3.5% down for 1-4 unit properties
- VA – 0% down for 1-4 unit properties
- USDA – 0% down for 1-4 unit properties in eligible rural areas
Government loans can open the door to real estate investing if you don’t have tens of thousands in cash laying around for a conventional loan down payment.
Calculating Your Maximum Purchase Price
When shopping for the right investment property, it’s crucial to know your maximum budget. This involves factoring in the down payment, your income and expenses, and projected rental income.
As a general guideline, your total monthly debt payments, including the future mortgage payment, shouldn’t exceed 45% of your gross monthly income. You want to leave room in your budget for unexpected costs and vacancies.
Use an investment property calculator to experiment with different down payments, home prices, interest rates, and rental income scenarios. This will help you hone in on an affordable price range.
Final Thoughts
A large down payment for an investment property doesn’t have to be a dealbreaker. Conventional loans provide excellent rates and terms, but aren’t the only route. Get creative with funding sources or look into government-backed mortgages.
Thoroughly assess your finances and don’t overextend yourself. With proper planning and realistic expectations, you can attain your real estate investing goals. The down payment is just the first step on the exciting path to generating passive income from rental properties.
Conventional loan down payments
→ You’ll likely need at least a 700 credit score to qualify for a 15% down payment for a conventional loan on a one-unit investment property. However, if you have minimal debt and/or a high income, you may be able to qualify with a credit score as low as 680. In those cases, your DTI ratio must be 36% or lower.
→ You’ll need a 25% down payment for an investment property with two to four units.
Read more about minimum mortgage requirements.
As long as you live in your second home for either 10% of the time it’s available for rent or more than 14 days — whichever is longer — IRS rules allow you to use the home as a rental property and deduct your rental expenses.
How to avoid a large down payment on an investment property
If you want to avoid the large down payment that comes with investment property loans, you could also use a real estate investment strategy known as house hacking. This involves renting out part of the property you live in, whether that looks like taking on a roommate, renting out your basement or getting tenants into an accessory dwelling unit (ADU) in your backyard.
House hacking is a more accessible way to buy a rental property, because you can use a government-backed loan that only requires a 0% to 3.5% down payment. You can even buy a multifamily home, like a duplex or triplex, so you don’t have to cohabitate with your renters. The table below summarizes the down payment requirements for rental property loans.
| Occupancy type | Loan program type | Minimum down payment |
|---|---|---|
| Investment property | Conventional (single family) | 15% |
| Conventional (multifamily) | 25% | |
| Owner-occupied (“House hacking”) | FHA (up to 4 units) | 3.5% |
| VA (up to 4 units) | 0% |
Conventional Loans: Requirements, Mortgage Rates, & Down Payments
Do you need a down payment for a conventional mortgage?
All conventional mortgage loans require a down payment. But the amount you need can vary widely. Home buyers can make a conventional down payment anywhere between 3% and 20% (or more) depending on the lender, the loan program, and the price and location of the home.
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.
How to get a conventional investment property loan?
According to LendingTree, the chances for getting approved for a conventional investment property loan strengthen when borrowers meet the following loan criteria: Minimum of 15% down payment, although some investors use house hacking to reduce the amount of money needed to put down.
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.
What is the minimum down payment for a rental property?
What’s the minimum down payment for a rental property? In most cases, the minimum down payment amount for a conventional investment property loan is 15%. However, several factors will determine your actual down payment requirement, including your credit score, debt-to-income (DTI) ratio, loan program and property type.
Can you buy a home with a 0% down payment?
You can use an FHA loan to buy an investment property with up to four units with as little as 3.5% down, provided you occupy one of the units as your primary residence. → If you’re eligible for a VA loan, you can purchase a one- to four-unit property with a 0% down payment.