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Most real estate investors just assume the minimum down payment for a rental property is 20-40%. Personally, I’ve bought investment properties with none of my own money down.
Real estate investment properties offer passive income, appreciation, landlord tax deductions, and diversification for your investment portfolio. So why doesn’t everyone become a landlord?
Yes, it takes skill to find good deals on properties, and some labor to manage rentals. But the real hurdle for most people is the hefty down payment for an investment property.
So how do you shrink that down payment? What’s the minimum down payment for an investment property that you can make? Get ready to get creative.
Investing in real estate can be an excellent way to build long-term wealth However, coming up with a large down payment of 20-30% can be a major barrier for many aspiring real estate investors The good news is that there are options for getting investment property loans with low down payments of as little as 3-5%.
In this comprehensive guide, we’ll explain everything you need to know about securing financing for an investment property when you don’t have a lot of cash on hand.
What Are Investment Property Loans?
Investment property loans are mortgages taken out by real estate investors to purchase a property that will be used to generate rental income This differs from a conventional home loan, where the borrower will live in the property.
With an investment property loan, the lender will want to ensure you can cover the mortgage payments through your other income sources, even if you have vacancies or non-paying tenants. Qualifying is generally more stringent than a primary residence loan.
Benefits of Low Down Payment Investment Property Loans
The main benefits of securing an investment property loan with less than 20% down include:
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Increased purchasing power – Putting down less money upfront allows you to buy a more expensive property that may generate higher returns. This maximizes your leverage.
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Preserve capital – Minimizing your down payment conserves more of your cash that could be used for renovations, another down payment, or as an emergency fund.
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Diversify your portfolio faster – Paying less upfront allows you to acquire more investment properties and diversify into different markets more quickly.
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Potentially higher returns – With the right financing strategy, a lower down payment can increase your cash-on-cash returns.
Drawbacks to Consider
While low down payment investment loans provide many advantages, there are some potential drawbacks to consider as well:
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Higher interest rates – Most low down payment options will come with a slightly higher interest rate, increasing your financing costs.
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Mortgage insurance – If your down payment is less than 20%, you will likely have to pay for mortgage insurance until you reach 20% equity.
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Prepayment penalties – Some asset-based loan programs aimed at real estate investors include prepayment penalties that deter early payoff.
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Lower cash flow – With a smaller down payment, your loan amount and monthly payments will be higher, reducing your net rental income.
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Less equity – It will take longer to build equity and eventual ownership when you put down less upfront.
Overall, the advantages often outweigh the drawbacks when used strategically. But it’s important to run the numbers for your specific situation.
Low Down Payment Investment Property Loan Options
If you want to purchase an investment property with minimal cash up front, here are some of the main options to consider:
FHA Loans
The Federal Housing Administration (FHA) offers a few low down payment loan programs that can be used to finance investment properties:
- FHA 203(k) Loan – Down payments as low as 3.5%. Can wrap purchase + renovations.
- FHA Limited 203(k) – Down payments as low as 3.5%. Renovations up to $35K.
- FHA Standard 203(b) – Down payment of just 3.5%. Must be move-in ready.
FHA loans offer competitive interest rates and low down payments for single family rentals and 2-4 unit properties. But they come with upper loan limits and stricter property requirements.
VA Loans
If you are a veteran or active military, VA home loans are a top choice. They require 0% down and have no maximum loan amounts in most counties. You must occupy one unit of a multi-family property. VA loans can only be used once for an investment property.
USDA Loans
For investment properties located in designated rural areas, USDA home loans offer 0% down financing. They are an incredible option if you qualify based on the property’s location.
Conventional 97 Loan
Conventional 97 loans are backed by Fannie Mae and Freddie Mac and offered by many lenders. You can qualify with just 3% down, avoiding mortgage insurance with an additional 3% lender credit. However, they come with very strict requirements.
Portfolio Loans
Local banks and credit unions commonly offer portfolio loans for real estate investors with down payments between 5-15%. They hold these loans on their own books rather than sell them to the secondary market. Terms are flexible but expect higher rates/fees.
Hard Money Loans
Hard money loans are asset-backed loans from private investors at higher interest rates, usually around 7-15%. They will lend up to 60-75% loan-to-value with very little regulation. Hard money gives flexibility but is expensive.
Private Money Loans
Private lenders provide alternative financing like hard money loans but at lower rates. They lend based on the deal/property rather than your credit. Typical down payments are 20-30% and interest rates vary from 6-12% on average.
HomeReady Mortgage
The HomeReady program from Fannie Mae makes it possible to buy an investment property with a down payment as low as 3% if you meet the income limits and complete a homebuyer education course.
HomePossible Mortgage
Freddie Mac’s HomePossible mortgage competes with Fannie Mae’s HomeReady product. It offers 5% down payments on 1-unit properties and 15-25% down on 2-4 unit properties.
Shared Equity Programs
If you purchase an investment property in an area with shared equity programs, you may qualify for down payment assistance resulting in lower cash needed upfront. These programs help provide affordable housing.
Seller Financing
Some property sellers may be willing to act as the bank and hold a mortgage for the buyer. This avoids traditional lender requirements, but fewer protections for buyers.
Tips for Success with Low Down Investment Loans
If you want to tap into a low down payment investment property loan, here are some tips that can set you up for success:
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Seek out the right loan officer – Find an experienced investment property specialist. Avoid consumer direct lenders.
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Get pre-qualified – This shows sellers you can actually obtain financing and locks in rates.
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Understand the requirements – Each loan program has specific stipulations regarding credit scores, reserves, property type, etc.
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Have a larger down payment ready – Come ready with 10-15% down even if the program only requires 3-5% to show extra borrowing strength.
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Scrutinize the fine print – Read the loan estimates closely and ask about any fees that seem abnormal or high.
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Build your post-purchase capital reserves – Plan to have 6+ months of mortgage payments and expense coverage when ownership begins.
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Target turn-key properties – Opt for newer properties requiring minimal renovations to reduce expenses and risk.
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Stress test yourself – Make sure you can still afford payments if you end up with extended vacancies.
Partnering With the Right Investment Property Lender
Choosing the right lender is critical when financing an investment property with minimal cash down. Here are key factors to evaluate when comparing mortgage lenders:
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Interest rates – Compare both nominal and APR rates across multiple lenders. Even small differences can impact your profits.
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Loan fees – Look for lenders waiving origination fees or closing costs for investment loans. Ask what is charged upfront.
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Loan terms – Review the available loan lengths. Longer 30 year terms mean lower payments.
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Experience – Ask how many investor loans they close each year. Opt for high volume investment property specialists.
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Property types – Make sure the lender finances the property types you are targeting – single family, 2-4 units, etc.
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Credit expectations – Inquire if they have more flexible credit requirements for real estate investors. 720+ FICOs may not be mandatory.
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Prepayment terms – Some lenders penalize paying loans off early while others do not. Understand any prepayment policies.
Taking the time to choose the right financing makes all the difference in successfully acquiring income property with minimal cash out of pocket through a low down payment investment loan.
Partner with Friends & Family
Instead of borrowing money from friends and family, you can always bring them into the deal as partners.
They contribute to the down payment for the investment property, and share in the profits as co-investors, rather than just giving you a short-term loan. Remember to always set out clear terms and expectations, as the dreaded mix that is family and money can be a headache if there is anything left in doubt.
For more ideas, check out 17 Clever Ways to Come Up with a Down Payment for a Rental Property.
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What do lenders charge for a rental property mortgage? What credit scores and down payments do they require?
How about fix-and-flip loans?
We compare the best purchase-rehab lenders and long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.
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House Hack a Multifamily
Properties with up to four units are considered “residential” in the US, so you can buy them with a conventional mortgage. That lets you buy a multifamily property with up to four units as your primary residence, move into one unit, and rent out the others to cover your mortgage payment.
You can even use the future rental income from the other units to help you qualify for the loan. You’ll also enjoy better loan terms, lower mortgage rates, and lower monthly payments. All of which leads to more monthly cash flow for you as a landlord, even after you move out.
Sometimes conforming loans require a higher down payment on multi-unit properties than single-family homes, but it varies by loan program. Compare instant prequalified rate quotes through Credible* for multiple loan options.
If you want to crunch the numbers on a potential house hack, try our free house hacking calculator.
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Learn how to earn 15-30% on passive real estate investments in one free class.
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