Let’s talk about what an investment property down payment might look like.
In order to understand the down payment required for an investment property, we need to look at the different ways an investment property can be financed.
Many folks who are just beginning to invest in real estate imagine that the only way to acquire investment properties (outside of paying cash) is to get a bank loan.
While traditional mortgage loans from a bank are commonly used to acquire rental property, they are certainly not your only option.
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In this post, I’m going to offer you a number of different ways you can get the cash/financing you need to acquire investment property along with how much of a down payment you can expect to cough up for each one. Let’s get started.
investment property down payment w/ Purchase Mortgages
Let’s start with bank financing, as our first option, since it’s fresh in our minds. Getting a loan from a bank to purchase a piece of real estate is called a purchase mortgage. Banks offer different loan options for you to choose from.
A conventional loan (one not back by the government) will usually require a down payment of 15-20%.
However, there are other government-backed loan options like VA, FHA and USDA loans. VA and USDA loans offer 100% financing (no down payment) while FHA loans require as little as 3.5% down. There are a few caveats, however.
To be eligible for a VA loan, you must be active or prior military. Furthermore, VA loans can only be used for multi-family investment properties, and the borrower must live in one of the units.
USDA loans can only be used for properties within certain rural areas. Like VA loans, USDA loans for investment properties will only work on multi-family dwellings through the USDA’s “Multi-Family Housing Direct Loans” program. However, According the USDA’s website, this loan program is specifically designed to “…provide competitive financing for affordable multi-family rental housing for low-income, elderly, or disabled individuals and families in eligible rural areas.”
With an FHA loan, you can’t finance a single-family investment property, but you can acquire a multi-family dwelling with a FHA loan as long as you live in one of the units.
Hard money loans
Hard money lenders, like banks, loan out other people’s money, but they’re not banks. Hard money loans can be a great alternative to bank financing as you may be able to close quicker than with a bank loan. Additionally, hard money lenders look more at the asset (property) and less on the financial picture of the borrower. In fact, they don’t typically even verify income and are less concerned about the borrower’s credit.
However, hard money lenders usually require 30%-35% as a down payment in addition upfront fees (points) ranging from 3-10% of the purchase price.
Private money loans
Private money loans are typically loans that are provided by close family members and friends. Given the personal relationship that usually exists between the lender and the borrower, the terms are unique to every situation. Private money loans can be a great way to come up with some or all of your down payment.
Personal loans & lines
If you’ve got good credit and a solid employment history, you may be able to qualify for a decent-sized unsecured personal loan or line of credit to help you with the down payment. Below is a short list of companies to consider:
Don’t forget closing costs
Regardless of your investment property down payment, you’ve still got closing costs to consider. Closing costs, for buyers, typically equate to 2-5% of the purchase price. Here are a few of the more common closing costs:
- Property Taxes
- Homeowners Insurance
- Title Insurance
- Attorney Fees
One way you can avoid having to pay most, if not all, of your closing costs is working a deal with the seller where they do what’s called a “seller’s concession.”
A seller’s concession is when a seller agrees to pay part or all of the closing costs for the buyer. You may have to pay a bit more for the house in order to get a seller to do this, but it can be a great way to get at least a good chunk of your closing costs paid for.
Knowing what a typical investment property down payment would be is important when determining what you need to prepare for as a real estate investor. Check out my post on investment property loans for more information on this topic.