How Much Is An Investment Property Down Payment?
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Before you begin investing in real estate, it’s crucial to understand what you’re expected to contribute as a down payment for an investment property, which is typically at least 15% of the purchase price.
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What’s the minimum down payment for a rental property?
In most cases, the minimum amount for an investment property down payment is 15%. However, the down payment you’re actually required to pay is determined by several factors, including your credit score, debt-to-income (DTI) ratio, loan program and property type.
| Loan type | Minimum down payment |
|---|---|
| Conventional (single family) | 15% |
| Conventional (multifamily) | 25% |
| FHA | 3.5% |
| VA | 0% |
Conventional loans
To qualify for a 15% down payment for a conventional loan on a one-unit investment property, you’ll need at least a 700 credit score — in most cases. One exception is if your DTI ratio is 36% or lower; in that case, 680 is the minimum required credit score. An investment property with two to four units requires a 25% down payment.
Government-backed loans
If you plan to buy a multifamily investment property that doubles as your primary residence, you may be eligible for a government-backed loan from the Federal Housing Administration (FHA) or the U.S. Department of Veterans Affairs (VA).
You can borrow an FHA loan to buy an investment property with up to four units with as little as 3.5% down, provided you occupy one of the units as your main home. You may qualify for a VA loan on a one- to four-unit property with a 0% down payment; however, one of the units must be used as your primary residence.
NOTE ABOUT VACATION HOMES
If you plan to buy a vacation home, in most cases, you will be required to make a minimum 10% down payment. Fortunately, you can use it as an investment property, but the income it generates won’t be included in your qualification calculations.
As long as you live in your second home for either 10% of the time it’s available for rent or more than 14 days — whichever is longer — IRS rules allow you to use the home as a rental property and deduct your rental expenses.
Reasons to make a larger investment property down payment
Although some government-backed loans allow you to purchase a rental property with no money down, many people choose to pay more. The reason: The higher your loan-to-value (LTV) ratio, the higher your interest rate and loan fees will likely be. If you can scrape together a bigger down payment, you stand to save thousands on interest and fees.
How much investment property can you afford?
Qualifying for an investment property mortgage involves proving your ability to comfortably manage the monthly payments. Before you make purchase offers, it’s wise to apply for a mortgage preapproval. This is the most straightforward way to determine how much investment property you can afford to buy.
Once you have a price range, take some time to research the local rental market online. Lenders typically consider 75% of your expected rental income as part of your loan application. This can be done easily if the property was already an investment property and there’s a rental history to evaluate. Otherwise, your lender can look at market rents in your area to come up with a reasonable estimation of rental income.
Don’t forget to factor in ongoing rental property expenses when figuring out how much you can afford. These may include but aren’t limited to:
- Landlord insurance
- Property taxes
- Maintenance and repairs
- Property management fees
- Vacancies
- Utilities
5 ways to make your investment property down payment
TAP YOUR HOME EQUITY If you have at least 15% equity in your primary residence, you could take out a home equity loan or use the proceeds from a cash-out refinance as a down payment for a rental property.
TRY OWNER FINANCING Instead of going through a traditional mortgage lender, you could try to arrange an owner financing deal with the home seller. You’d agree to a repayment agreement directly with the seller and sign paperwork giving the seller the right to foreclose if you fail to pay the loan.
CREATE AN INDIVIDUALLY DIRECTED IRA If you convert an individual retirement account (IRA) or 401(k) into a self-directed IRA (SD-IRA), you can invest in real estate using your retirement funds.
TRY GROUP INVESTING Real estate investing groups (REIGs) allow small groups of people to pool their money and invest together. REIG members typically share the labor of managing the properties they own and the income earned.
SAVE OVER TIME This option can take the longest to achieve, but it doesn’t involve borrowing. Having cash reserves set aside for your rental property investment helps illustrate your readiness for the landlord role.
How to get approved for an investment property loan
To strengthen your chances of approval for a conventional investment property loan, you’ll need to meet the following loan criteria:
→ A minimum 15% down payment. However, if you’re buying a multifamily property as a primary residence and going the house-hacking route with a government-backed loan, your minimum required down payment could be less.
→ A minimum 700 credit score. Unless you plan to make an investment property down payment of 25% or more, you’ll need at least a 700 credit score. To get quoted the best mortgage rates though, improve your score to 740 or higher.
→ A maximum 45% DTI ratio. The percentage of your gross monthly income that is used to pay your monthly debt can’t exceed 45%.
→ A minimum of six months in reserves. You’ll likely need at least six months in cash reserves to buy an investment property. Your lender wants reassurance you can continue to pay the mortgage when you’re in between tenants.
Arguably, though, the most important of these factors is your down payment amount. While your credit score, DTI ratio and savings hold weight, how much money you put down can make or break your real estate investing goals.