Far less esoteric than the stocks and bonds that make up the rest of your portfolio, real is a real, physical asset. One you can see, touch, inspect, and gather your own information about.
Building wealth as your property value increases is exciting, and also provides a way to continue your real estate investment snowball. Your real estate equity grows from tenants paying down your mortgage, and from appreciation. And let’s not forget rental property tax benefits, either.
With all these spectacular upsides, why isn’t everyone a landlord?
There is one big hurdle that stands in most people’s way: the down payment. However, you are not most people, so it’s time to learn how to minimize the down payment required for an investment property. You need to understand how much down payment you will need, and the credit and income requirements.
We’ve got you covered.
Table of Contents
Using Primary Residence Loans for Real Estate Investing
I want to invest in real estate, so now what?
The down payment you will need for your investment property is determined by several factors, including your income, credit score, and debt-to-income ratio. Beyond the down payment, they also determine your interest rate, points, and loan terms.
However, you also need to consider whether you will live in the rental property or not. By house hacking or doing a live-in flip, you can take advantage of 3% down payment loans for investment properties – or at least properties that will be used for investing eventually.
It works because if you choose to live in the property for at least a year, there are far more loan options available. For example, if you house hack by buying a duplex, renting out one side and living in the other, you can qualify for a conventional mortgage with a 3% down payment through Fannie Mae. Compare quotes through LendingTree or Credible for multiple loan options, if you want to try this route.
You could also use an FHA loan if you are willing, as long as there are four units or less in your investment property, and you live in one of them. In this case, you can qualify for a 3.5% down payment, as long as your credit score is over 580. You will also have more flexibility with terms and rates.
Down Payments for Investment Property Loans
If you don’t plan to live in your investment property, expect to put down 15-25% on an investment property loan.
Lenders see investment properties as a riskier venture, as you are more likely to default on a property you do not live in. As with traditional mortgages, there are a few different types of investment property mortgages you should familiarize yourself with. If you go with a conventional mortgage, you will need high income, excellent credit, and “seasoned” cash reserves for the down payment.
With a portfolio loan, you will need to put down at least 20%. However, most portfolio lenders allow you to borrow the down payment, unlike conventional mortgage lenders. That means you can use business credit lines and cards like Fund & Grow helps you secure, to draw on and cover the down payment.
Income matters less, while the quality of your deal matters more. Portfolio lenders scrutinize the profit margins on your deal, and look less at your income or the source of your down payment. In fact, many portfolio lenders like Visio and LendingOne don’t require any income documentation whatsoever.
Portfolio lenders underwrite your loan in the context of your likelihood to make money on the property, rather than traditional mortgage qualifications.
How Credit Impacts Down Payments for an Investment Property
Now that you understand the range in typical minimum down payments, how about the other factors?
Your credit score is very important in determining which end of the spectrum you fall on when it comes to the down payment for an investment property. Better credit means lower interest rates, lower closing costs and fees, and more loan program options available to you. As you try to find good deals on investment properties, start working to build your credit quickly.
According to the Fannie Mae eligibility matrix, you will require a credit score of 700 or higher for any down payment less than 25%, and a credit score of 640-699 for a loan with 25% down. To get to that low end of 15%, you’ll need a credit score of 720 or more. The better your credit score, the more leeway you have in the 15%-25% range, the lower your interest rate, and the better your loan terms will be.
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Income, DTI, and Down Payments Rental Properties
The last piece in determining your minimum down payment criteria is your debt-to-income ratio, or DTI. If you want to purchase a single-family home through a Fannie Mae conforming loan, and your DTI is 35% or less, you can qualify for a 25% down payment with a credit score of 640. If your DTI is between 37% and 45% you would need a credit score of 660 to get that same 25% down. In both cases, if your credit score is 700, you could qualify for less than 25%. There is room to play with either credit score or DTI, and maximizing both will give you the option for the smallest down payment required for purchasing your investment property.
Or you can skip the income requirement entirely by using a portfolio lender like LendingOne, Visio, or Kiavi.
8 Tactics to Lower Your Down Payment for Investment Properties
Now that you have minimized the down payment for an investment property to the smallest possible requirement, here are some tips, tricks, and ideas to reduce your down payment.
1. House Hacking
As outlined above, properties with up to four units are considered “residential” in the United States, so you can take out a traditional mortgage to buy them. You can also house hack a single-family home by adding a basement or garage suite, renting out rooms (either permanently or on Airbnb), or adding a tiny guest house on the property. Deni even house hacks with a foreign exchange student!
Whether you choose a multi-unit home you live in, or reconfigure your single-family residence, you will qualify for a much lower down payment if you opt for an owner-occupied mortgage. You can reduce or eliminate your housing payment to live for free, while your tenants making the mortgage payments for you. You’ll also enjoy better loan terms, lower interest rates, and lower monthly payments. All of which leads to more cash flow for you as a landlord.
One downside here is that you need to reside in the home or one of the units in the property, at least for a year after taking out the mortgage. Another is that conventional mortgages not only report on your credit, but they put a cap on how many loans you can have reporting on your credit, which means you can only house hack a few investment properties before reaching the conventional mortgage ceiling.
If you want to crunch some numbers and find out what you can make house hacking, try our free house hacking calculator.
2. Borrow the Down Payment
Whether from a HELOC, personal loan, friends, or family, borrowing the down payment may be an option to reduce the cash you need up front. But be warned: conventional lenders typically don’t allow any part of the down payment to be borrowed.
That leaves portfolio loans, so expect to put 15-25% down. If you already have real estate equity, either in your home or a rental property, you can open a HELOC to borrow that equity as a down payment for a new investment property. Check out Figure for low HELOC rates, and keep in mind you can take out HELOCs against your rental properties, not just your home.
Better yet, draw on unsecured business line of credit or card. Use Fund & Grow to open a series of unsecured business cards and credit lines, which come with 0% initial interest rates and only 2.5% in cash advance fees.
Alternatively, you could always ask your friends and family to borrow part of the down payment. The loan terms certainly can’t be beat!
Just make sure you have a strong track record of high returns and cash flow with your existing properties, before putting your personal relationships on the line. And remember that setting clear terms, interest rates, and repayment schedules (and sticking to them!) is essential for maintaining the friendly relationship.
Doing a quick borrow from your 401 (K) may also be something to consider, though this is risky and difficult. As long as you are certain you can pay it back within 60 days (the maximum time to borrow without penalties, back taxes, and lots of tears), this may be a good short-term source of cash.
3. Seller Financing
Seller-held second mortgages are a common way for investors to borrow some or all of the down payment from the seller. Most often, sellers finance these loans for a 3-5 year term, possibly with a balloon payment due at the end rather than amortizing the entire loan over 3-5 years.
The terms, up-front fees, and amortization period are negotiable with the seller. In fact, no one says seller financing is limited to just the down payment. You can sometimes secure your entire financing from the seller, if they own the property free and clear. Or if they don’t, you may be able to assume their mortgage.
Some buyers negotiate a higher monthly payment that includes a stipend for the seller in place of a down payment, some negotiate a lower down payment altogether, such as 5%-10%. As they say, everything in life is negotiable!
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What short-term fix-and-flip loan options are available nowadays?
How about long-term rental property loans?
We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.
4. Improve Your Credit
As outlined earlier, improving your credit is always suggested before you dive into investment property shopping. The first step is to check out your current credit score to see what you are working with, looking carefully for any mistakes or omissions. If you spot an error, file a dispute with the credit bureaus.
Beyond disputing errors, there are three proven ways to improve your credit:
- Paying down your debt, thereby decreasing your credit utilization.
- Making sure all payments and bills are made on time.
- Not opening or closing new lines of credit while waiting to make your property investment.
You should be paying all bills on time and paying off your credit cards in full every month regardless, but having a look with fresh eyes on your goal to make sure you are ticking all the boxes is especially crucial before investing.
5. Use the BRRRR Method
No, it’s not cold in here.
The BRRRR method, or buy, renovate, rent, refinance, repeat, doesn’t necessarily reduce your down payment, but it does let you finance it after renovations are complete. The trick here is to make sure you buy a property you can force equity in by renovating.
You can borrow 100% of the renovation costs using a purchase-rehab loan, renovate the home, find renters, and then refinance, at which time you will be able to pull the initial down payment back out with your new loan. (It works because your new loan is based on the after-repair appraisal, not your initial purchase price.)
Just make sure the property will still cash flow well, even after financing 100% of your costs. Use our free rental cash flow calculator to forecast your ROI and monthly net income.
6. Cross-Collateralization
Right… what’s that exactly?
Instead of making a down payment, you can let your lender put a lien against your home or another rental property you have equity in. The lender waives the down payment requirement because they have additional collateral.
They secure two properties under one loan and, should you default, they will have two properties to foreclose on to recover their loan. Which is itself an important point: you stand to lose more than just the new property, if you default on the loan!
7. Co-Investment from Friends & Family
Instead of borrowing money from friends and family, you can always bring them into the deal as partners.
Asking to share in the down payment and a portion of the profit (ahem, to be set out in writing ahead of time) as co-investors, rather than just asking to borrow money. 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 15 Clever Ways to Come Up with a Down Payment for a Rental Property.
8. Use a Credit Line to Finance the Entire Property
With a HELOC or unsecured business credit line, you can potentially finance the entire property purchase.
The limit on your HELOC depends on the equity in your home or other rental properties. But the limit on your business credit lines and cards depends almost entirely on your credit score. For example, Fund & Grow helps the average real estate investor open between $150,000-$200,000 in unsecured credit lines. And some investors get up to $250,000 in total credit lines and cards.
Cards you can draw cash from with only a 2.5% advance/withdrawal fee. Which is lower than most lenders charge in the form of points and flat fees.
Depending on your market, $150,000-$200,000 in credit lines are often enough to let you buy rental properties in cash. And if not in your local market, look into some of the best cities for real estate investing in the US, along with the cheapest real estate in the US. It’s easier than ever before to invest in real estate long-distance, both through Realtors and through turnkey property platforms like Roofstock.
Final Thoughts
Should you always just stick to the minimum down payment for an investment property? Are there are upsides to increasing that down payment amount?
When flipping a house, a higher down payment rarely helps more than it hurts. However, if you are buying a long-term rental property, there are definitely upsides to an increased down payment if you can swing it.
The first is obvious, the higher the down payment, the higher the equity. You will also benefit from lower interest rates and payments, something to consider if you are having the tenants cover the mortgage for you. If that is your end goal, it is an important piece of improving your overall cash flow. The more money you put down initially, the less you owe for your loan, and the more money that is flowing into your pocket.
There are myriad ways to invest in a home. Deciding which one is best for you is simple when you consider your credit, income, and DTI, as well as the type of income property you want to invest in.
The first property is the hardest. Your cash flow and equity from each property you own will only make it easier as you build your portfolio!
What tactics have you used to reduce your down payment on investment properties? What are you thinking about trying for your next rental property? Share your thoughts below!
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Great information Brian! We are working on the BRRRR method personally. This is the perfect article for a good share. I will be passing this along! Thanks!
Glad to hear it Dan, and keep us posted on your progress!
Every financial decision is about weighing the rewards, determining payoff against potential risk.
So true Dave!
Great ideas for minimizing the down payment! Thanks for these, going to try a few.
I am buying a 2-family home and plan to occupy one unit while we sell our primary home (>50% equity) and then work with a developer to build our dream retirement home. We are getting conflicting responses from lenders regarding obtaining a owner occupied conventual loan. No issue with 20% down as planning for a longer term rental after we leave. My question is regarding the 1 year minimum occupancy, is that the only requirement we need to fulfill? Being told otherwise and also by one lender that 25% is required and doesn’t believe our other offers are valid with only 20% down.
You can definitely get an owner-occupied loan for a two-unit property. Some programs let you put down less than 20% as well. But a lot of lenders don’t do many multifamily properties, so aren’t familiar with them. I’d speak to a few more lenders if I were you. Just don’t let them pull your credit until you commit to one.
I used to partner with a family member until we had a little feud but we are all good now. I learn my lesson so I am currently improving my credit score and using BRRRR Method but I might try other methods that are mentioned in this article. It is good to have a lot of options. Nice read.
Glad to hear you smoothed over your disputes with your family partner Adam!