One of the biggest obstacles that would-be real estate investors need to overcome before buying their first property is saving up enough money for a down payment. But how much is enough? Unfortunately, there’s no perfect answer to this question.
For example, down payment requirements on conventional loans can be different than commercial loans. And the down payment requirements for a vacation rental can be different than for an investment property.
With that in mind, here’s a guide to help you determine how much money you’ll need to put down when buying your next investment property. It should also help you analyze all the options at your disposal to find the one that works best for you.
A conventional mortgage is one that a lender makes to you and is dependent on your credit, income, and other debts. If a conventional mortgage is below certain lending limits and conforms to Fannie Mae or Freddie Mac’s standards, it’s known as a conforming loan. If it exce these limits, it’s known as a jumbo loan.
If you finance the property as an investment property, you’ll typically need at least 20% down. Fannie Mae’s minimum lending standards allow single-family investment property loans with as little as 15% down, but this jumps to 25% for multifamily properties. And keep in mind that these are the minimum standards. Many lenders use more restrictive requirements when originating investment property mortgages.
Another option is to finance an investment property as a second home. This option is only available if you plan to use the property yourself at least some of the time and you’re planning to buy a single-unit property (a house or condo). The down payment requirement is only 10% if you choose to pursue this route.
Of course, these are just Fannie Mae’s standards, but most conventional lenders (even on jumbo loans) use similar requirements. You’ll generally need strong qualifications to get the minimum down payment, which could mean high credit, a strong debt-to-income ratio, and several months’ worth of expenses in liquid reserves.
Just because you might be able to put less than 20% down on an investment property in many cases doesn’t make it a great idea. You’ll need to pay mortgage insurance until your loan-to-value (LTV) ratio drops below 80%. This can put serious pressure on the property‘s cash flow, so be sure the numbers still work.
With conventional mortgages, down payment requirements aren’t favorable on multi-unit properties as you can see in the last section. However, there are some great options if you’re planning to live in the property. FHA loans are especially convenient.
While FHA mortgages have higher fees than conventional loans, they only require a 3.5% down payment for most borrowers. This includes loans made for multifamily properties. So an ambitious homebuyer could, for example, buy a triplex for $300,000 with just $10,500 down and have a place for themselves to live as well as two rentable units to start their portfolio.