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How Much Is a Down Payment for an Investment Property?

TLDR

What You Need To Know

  • There’s no universal minimum down payment required for buying investment property
  • A larger down payment can get you better loan terms, save you money on interest charges over the life of the loan and reduce the size of your monthly payments
  • If you’re considering putting down less than 20%, remember most lenders will charge primary mortgage insurance (PMI) with a conventional mortgage

Contents

If you’re thinking about generating rental income by purchasing an investment property, you’re probably wondering how much money you need for the down payment.

Though the process of buying an investment property shares some similarities with buying a primary residence or second home, it’s important to understand the differences – like the down payment requirement.

We’ll review your loan options for buying an investment property, explain what kind of down payment you can expect to make and share some tips for successfully buying and managing your rental property.

Minimum Down Payment for an Investment Property

There’s no universal minimum down payment required for buying an investment property. The size of your down payment can range from 0% – 25% of the purchase price and will depend on several factors, including:

Choosing an investment property mortgage

Finding out the minimum down payment requirement starts with deciding which loan is best for you. Many home buyers looking to finance investment property will opt for conventional loans – those backed by Fannie Mae and Freddie Mac. However, it may be possible to buy a rental property using government-backed loans from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA). 

If you decide to finance your investment property purchase with a government-backed loan, you won’t be able to buy just any property. FHA, VA and USDA loan programs usually require the home you’re financing to serve as your primary residence – at least for a little while.[1] [2] [3] 

Nevertheless, you may still be able to use a government-backed loan to buy an investment property, such as a multifamily property where you occupy one unit and rent out the other(s).

Down payment requirements by loan 

Check out the table below to see minimum down payments on some of the most common investment property loan types. 

Select a tab to see related data:
  • Loan Type
  • Minimum Down Payment
Loan Type Minimum Down Payment
Conventional loan (single unit) 15%[4]
Conventional loan (multi-unit) 25%[4]
FHA loan (primary residence) 3.5%[5]
FHA loan (non-primary residence) 25%[6]
VA loan 0%[7]

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Why Should You Make a Larger Down Payment?

If you can afford to make a larger down payment, it may be a worthwhile investment in the long run. 

A larger down payment can get you better loan terms, save you money on interest charges over the life of the loan and reduce the size of your monthly payments.

However, larger down payments aren’t always the best idea. For instance, putting more money down might unnecessarily stress your finances if you’re working with a tight budget or need to save for other expenses.

Another important consideration when making your down payment on an investment property is having to pay mortgage insurance. If you’re considering putting down less than 20%, remember most lenders will charge primary mortgage insurance (PMI) with a conventional mortgage. And FHA mortgages will require a mortgage insurance premium (MIP).

Ways To Finance an Investment Property Down Payment

The best and most common way to finance the down payment on your investment property is to save up and pay with cash. But if you don’t have enough cash, or you’re just looking for another way to afford a down payment on investment property, you may still have a few financing options. 

Before borrowing money to pay for a down payment on investment property, make sure your primary lender doesn’t have any restrictions on using borrowed funds toward your down payment. Many lenders who issue conventional mortgages or FHA loans won’t allow you to use personal loans to fund your down payment.

Now that you understand some of the challenges of taking out a separate loan for your down payment, let’s talk about the different loan types you can use.

Home equity

When you have enough home equity (usually at least 15% – 20%, depending on the lender), you can take out a home equity loan or home equity line of credit (HELOC) and use the proceeds to fund a down payment on an investment property. 

Both home equity loans and HELOCs are second mortgages that allow you to borrow money against the equity you’ve built in your home. Home equity loans give you a one-time lump sum payment, while HELOCs are revolving lines of credit you can borrow from as needed during a draw period that typically lasts for 5 – 10 years.

Private loan

A private loan (or hard money loan) is a non-traditional mortgage issued by a private lender, which can be an individual or a company. Private loans are more flexible than traditional loans from banks and credit unions, but they also tend to come with higher interest rates and may include additional fees. 

These loans can be extremely risky, as the lenders aren’t subject to traditional loan regulations. 

Group investing

Group investing is when individual investors pool their resources to make an investment. As an individual, you might only have $10,000 for a down payment. But if you have four other real estate investors with $10,000 each, you’ll be able to afford a $50,000 down payment.

Just remember that you’ll have to trust your partners in the investment, and you may only have partial control over the property.

Owner financing

If you find an investment home you love, it’s worth asking the current homeowners if they’re willing to offer seller financing (owner financing). This is when the seller of a property agrees to act as the lender, giving you the money you need to purchase the home in exchange for promising to pay the money back with interest.

A seller might agree to finance the deal if they’re looking to sell the house quickly, sell as-is or use the interest you’ll pay them as passive income. 

Owner financing can be a convenient option for home buyers struggling to obtain a traditional mortgage. However, owner financing can be costlier and a little risky, since the terms of the contract might favor the seller.

Bridge loan

A bridge loan (aka swing loan or gap financing) provides you with temporary, short-term (typically 6 – 12 months) financing to help you through a transitional period. One of the most common reasons borrowers take out bridge loans is to close on the purchase of a home before selling a home they currently own. 

Bridge loans are useful when you only need a loan for a few months, but they still come with some downsides you’ll want to consider. 

You’ll likely pay higher interest rates on a bridge loan compared to a more traditional loan, like a 30-year fixed-rate mortgage. Bridge loans are usually contingent on having a certain amount of equity in an existing home and selling it to pay off the loan. In the meantime, you’ll have to deal with the stress of paying back your mortgage and the bridge loan, and you may not have alternative options if the debt comes due and you haven’t sold your other house.

House hacking

House hacking is when you rent out part of the single-family home you live in to reduce your cost of living or generate passive income. You can house hack by renting out one or more bedrooms in your house – or even your garage, pool house or storage space.

House hacking is a great way to finance the purchase of investment property because your renters can help you cover the cost of the mortgage. If you become an expert house hacker, your rental cash flow could cover the entire mortgage payment.

Retirement account

Some people are surprised to learn that you can use the funds from your retirement account to purchase real estate – without paying penalties for early withdrawals. 

To purchase property using a 401(k) or Individual Retirement Account (IRA), you’ll have to complete a rollover of your current retirement account to a self-directed IRA (SDIRA). 

Before buying real estate using your SDIRA, make sure to read all the rules and restrictions around prohibited transactions in an IRA. For example, you won’t be able to live in or otherwise use the property, borrow money against it or use it to secure a loan.[8]

Friends and family

Turning to friends or family with the financial means to help finance your investment property can be a quick, convenient and cost-effective way to come up with the money you need for a down payment.

A friend or family member could provide more favorable terms on a loan by co-signing, or they can simply gift you the money. (though, they’ll have to file the IRS gift tax form if they give you more than $16,000 in a year).[9]

Financing a down payment on an investment property with money from friends and family can be a lifesaver. But you also run the risk of straining relationships when you mix personal and professional matters.

Tips for Buying an Investment Property

Down payments aren’t the only thing you need to think about when buying an investment property. In addition to the lump sum cash payment we call the down payment, there are some other costs and considerations to factor into your decision. These include, but are not limited to:

  • Property taxes and income taxes
  • Mortgage rates
  • Closing costs
  • Housing market trends
  • Potential return on investment (ROI)
  • Whether you’ll hire a property manager to oversee your investment
  • How you’ll track investment income and expenses
  • How you want to invest – alone or with an investment partner

Getting approved for an investment property loan

Once you come up with your real estate investing goals and a strategy to help you achieve those goals, you’ll want to do everything in your power to improve your odds of getting approved for the mortgage loan of your choosing.

Tips for Getting Loan Approval

Know what credit scores you need

Every lender has its own credit requirements. While most lenders will look for minimum credit scores in the high 600s, you may be able to find some private lenders willing to issue the loan if your credit is in the lower 600s.

Check with your lender to learn what the credit requirements are before applying for the loan. If you need some time to improve your credit score, it may be worthwhile to do so in advance of submitting a loan application.

Have the right DTI

A low DTI ratio means you earn significantly more than you borrow, which is exactly what lenders want to see. Many mortgage lenders will have a maximum DTI ratio requirement, depending on the loan type, which can be 45% – 50%. Although, they’ll probably prefer to see 36% or less.

Ask your lender if they have a maximum DTI ratio requirement, and if they do, consider taking action to reduce your debt before applying for the loan.

Show me the money

Beefing up your bank account with significant cash reserves can help you make a strong case for a lender to approve your loan.

This is especially important when financing an investment property that won’t be your primary residence. Cash reserves demonstrate to the lender that you’ll be able to make your mortgage payments, even if you have trouble finding tenants or collecting rent money.

Get preapproved

A mortgage preapproval shows home sellers that you’re a serious buyer and have already taken steps toward getting a loan. Mortgage preapprovals don’t guarantee you’ll get the loan, but it does indicate that the lender has done some preliminary diligence and is more likely to approve your loan application.

Push Up Your Down Payment

While your cash savings, credit score and DTI ratio are important, the size of your down payment can play a big part in determining what kind of loan terms you receive. Buying an investment property is a long-term commitment, and a larger down payment can help you get better loan terms, in addition to reducing your overall debt and the size of your monthly payments. 

  1. U.S. Department of Housing and Urban Development. “Section B. Property Ownership Requirements and Restrictions.” Retrieved September 2022 from https://www.hud.gov/sites/documents/4155-1_4_SECB.PDF

  2. U.S. Department of Veterans Affairs. “Chapter 3. The VA Loan and Guaranty.” Retrieved September 2022 from https://benefits.va.gov/WARMS/docs/admin26/m26-07/Chapter_3_The_VA_Loan_and_Guaranty.pdf

  3. U.S. Department of Agriculture Rural Development. “Chapter 6: Project Occupancy.” Retrieved September 2022 from https://www.rd.usda.gov/files/3560-2chapter06.pdf

  4. Fannie Mae. “Eligibility Matrix.” Retrieved September 2022 from https://singlefamily.fanniemae.com/media/20786/display

  5. Federal Deposit Insurance Corporation. “203(b) Mortgage Insurance Program.” Retrieved September 2022 from https://www.fdic.gov/resources/bankers/affordable-mortgage-lending-center/guide/part-1-docs/203b-mortgage-insurance-program.pdf

  6. U.S. Department of Housing and Urban Development. “Section B. Property Ownership Requirements and Restrictions.” Retrieved September 2022 from https://www.hud.gov/sites/documents/4155-1_4_SECB.PDF

  7. U.S. Department of Veterans Affairs. “VA Guaranteed Loan.” Retrieved September 2022 from https://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf

  8. Internal Revenue Service. “Retirement Topics – Prohibited Transactions.” Retrieved September 2022 from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions

  9. Internal Revenue Service. “What’s New – Estate and Gift Tax.” Retrieved September 2022 from https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax

ICYMI

In Case You Missed It

  1. A larger down payment is a great idea if you have the cash, but it’s not necessarily the right choice for every home buyer

  2. It’s possible to finance a down payment by using money from home equity, private lenders, your retirement account or family and friends

  3. The size of your down payment, along with your credit score and DTI ratio, will influence the loan terms offered to you by a lender

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