How Much Down Payment is Required for a Rental Property?
Jan 7, 2023
Are you thinking about buying an investment property? Perhaps you've got your eyes set on a single family rental, a duplex or even a small apartment building.
As you begin analyzing deals, you'll need to decide if the appreciation, tax benefit and monthly cash flow is attractive enough to invest. Many novice investors question whether rental properties are good investments because some deals require big up front capital outlays. The down payment plus closing costs should make the investor feel comfortable that they'll generate a handsome return and also enjoy appreciate along the way.
What Is a Down Payment?
Put simply, the down payment for a property is the amount you must provide in order to close on a mortgage loan. There are several scenarios where you may not need a down payment at all, such as with seller-financing for example.
A down payment is calculated as a percentage of the total price of the property. For example, if the lender wants 20% for a home that costs $400,000, you’d need to give them $80,000 as a down payment.
How Much Down Payment Do You Need for an Investment Property?
As a rule of thumb, real estate investors normally make a down payment of 20-25% when financing an investment property, although there are scenarios where you may be able to obtain a loan for as little as a 10% down payment.
Buying a Rental with No Money Down
The biggest thing holding back many people from getting into real estate are the closing costs and up front capital needed. Luckily, you don’t always have to empty your bank account to purchase a rental property. Believe it or not, it is actually possible to buy rental properties with little to no money down.
With a little bit of financial creativity, you may be able to purchase a rental property and start enjoying all the investment benefits. Examples of these methods include house hacking, seller financing, rent-to-own and the "BRRRR" method.
Types of Mortgages for Rental Properties
The kind of mortgage you’ll be applying for plays a big role in how much you have to save. While there are well over a dozen different types of mortgages, here are four common examples that help illustrate this point:
- 30-Year Conventional Mortgage – This is the most popular type of mortgage. In this scenario, you could purchase an investment property as a second home and benefit from a lower down payment of only 10%.
- FHA Mortgage – Mortgages from the Federal Housing Administration are also very popular. One reason is that they only require a 3.5% down payment. However, you’ll need to match the FHA’s requirements for buyers before you’ll be considered and you'll need to occupy the investment property for a period of at least 1 year. This commonly referred to as house hacking.
- Hard Money Loans – Hard money lenders typically require a 20-25% down payment and also tend to have higher interest rates.
Alternative Financing Options
While a 20-25% down payment seems steep, luckily there are actually several options for obtaining financing that are less traditional such as the options below:
A home equity loan is a great way to fund the down payment for an investment property by using the equity in a primary residence. Generally, lenders only allow around 80% of the equity in a home to be borrowed, so you'll need to have a decent amount of equity in the existing home.
There are several other creative options and tips for getting started with investment properties. Each deal is different and the exact down payment may be structured uniquely for each transaction.
Start Saving for Your Down Payment Right Away
The sooner you consider the four factors we outlined above, the sooner you’ll be able to start saving for your down payment. As you now know, the longer you give yourself, the better.
And here’s one more way to save money for that all-important down payment: sign up for the SimpleShowing Buyer Refund Program. If you're buying in Florida, Texas or Georgia, you'll get an average $5,000 towards closing costs which will help offset the amount of money you have to provide at closing.