How to get the down payment for a rental property

Down payment for a rental property can be secured by exploring different loan options, owner financing and acquiring services rendered by property management companies. According to Rene Bermudez, the author of “How Much Is the Down Payment for a Rental Property?”. Following are the key points on how to get the down payment for rental property.

• Conventional Loans: Conventional loan is type of loan, where the down payment of purchase price is about 15-25% for one-unit investment property. And it is around 25% for a 2-4 single unit property. It is loan volume dependent.
• Government-Backed Loans: FHA loans with up to 4 units, allows a down payment with as low as 3.5% for investment property loan. VA money loans allows down payments with 0% for purchasing a one- to four-unit property. You must live in one unit.
• House Hacking: Purchasing a multi-family property, living in one unit and renting out enables you to be considered for 3.5% down payment with FHA loan.
• Portfolio Loans: According to Brian Davis, these loans offered by portfolio lenders, usually demand 15% to 30% down payments but it is more flexible on credit scores and employment history than conventional lenders. In this case, portfolio lenders can be banks or other financial institutions.

The property down payment depends on loan type, property type and credit profile. The loans buyer take can lie in category of personal loan, private loan and short term loans. The buyer is needed to draft a loan application with favorable loan term. The loan can also be for commercial purpose. You can explore different financing options in real estate market to establish the best approach to secure down payment for rental property investment. By consulting a real estate agent you can decide what your payment options could be, if in need of a loan what type of loan would be best, which mortgage is a viable option and be well informed of typical range for down payment and can make a well informed decision.

Is a 20% down payment required for rental property?

No, a 20% down payment is not always required for rental properties. The down payment required can vary depending on several factors, but the main one is, whether you, the buyer,  live in the property. If the buyer lives in the property, then the buyer can come in with as little as 3.5% down (uncommon), or anything higher (10% is common, 15%, also common). 20% is the most common down payment and is recommended to keep payments under control and alleviate the need for mortgage insurance (which is an extra payment per month that is simply wasted essentially- read about what mortgage insurance is HERE). However, 20% is not in any way, the minimum amount required. According to Rene Bermudez in her article “How Much Is the Down Payment for a Rental Property?”, typical range of down payment is around 15% with the median cost of a house being around $399,999, that is around $60,000. This is quite a large sum and can be difficult to put down. 

Can I buy a “vacation home” for less than 20%?

The answer to this is yes. A “Second Home” can be purchased for as little as 10% down, and oftentimes, homebuyers buy a vacation home, and then AirBNB it. This is a great strategy that has become popular in recent years. BTRE has years of experience in procuring AirBNB properties and assisting in their management.

Can you use a first time home buyer credit for rental property?

Yes, you can use the first time home buyer credit for rental property PROVIDED that you live in the property as well. (I.E. it must be a house hack or a muti-unit where you live in one and rent the other) This is one of the best (actually, probably THE best) way for people to get their feet wet in real estate.

What is the minimum down payment for a rental property?

The absolute minimum down payment for rental property – that is one where the buyer does not live and is an investment only – is 15%. According to the research, Rene Bermudez stated that this payment requirement will depend on several factors, for example credit score, debt-to-income (DTI) ratio, loan program, and the type of property.  And, further, in almost every scenario, the payment will need to be at least 20%. 

However- If the “rental property” is a “second home” (or vacation home) that the buyer is intending to turn into a vacation rental/AirBNB – the buyer  can come in with as little as 10%. BTRE has done quite a few of these 10% deals!

What are some saving strategies for a rental property down payment?

Here are some saving strategies for a rental property down payment:

1. Stick to a financial plan
2. Eliminate outstanding balances on credit cards; aggressively pay down the highest balances/highest interest rates as fast as you can; take advantage of 0% balance transfers if appropriate;
3. Share living expenses with a housemate/roommate;
4. Relocate to more affordable housing;
5. Trim non-essential expenses;
6. Liquidate unused possession;s
7. Launch a secondary income stream;

Monthly debt payments take away a good chunk of monthly income so paying of debt as soon as possible should be priority so more can be saved for investing in rental properties. Getting a roommate or moving to a cheaper apartment can reduce living costs by a substantial amount. Not eating out, buying second hand clothes. All these saving tactics which sound unpleasant, annoying, and like they probably wouldn’t matter much, do in fact, add up over time. Say what you want about Dave Ramsey, but he has some great advice for saving money every month. 

Are there down payment assistance programs for investors?

Yes, there are down payment assistance programs for investors for initial purchase. According to Meeghan Truelove, down payment assistance (DPA) programs help homebuyers to have financial stability in the forms of loans or grants. They have plenty of options for it. These programs commonly focus on first-time homebuyers or individuals with moderate income ratios in contrast with their local areas. They are managed by state housing agencies, large cities, nonprofits, and certain mortgage lenders to help homebuyers. There are all kinds of mortgages that are viable options for assistance to pay the down payment.

1. Conventional mortgages
2. Traditional mortgages
3. Fixed-rate mortgages
4. Adjustable-rate mortgages
5. Renovation mortgages
6. Blanket mortgage

The key difference between these assistance programs is the mortgage rates and the terms. Some are short-term loans while others are long-term mortgages.

Can I use home equity for a rental property down payment?

Yes, you can use home equity for a rental property down payment. According to Kacie Goff, especially for investments, home equity lending is riskier than simply holding a personal residence because the property owner is less likely to lose and the probability is higher that they’ll fail to repair their payments usually in case of large loan volume. It can be difficult to secure a home equity loan for an investment property as the interest rates are generally higher because private lenders, traditional lenders and money lenders want some downside protection and surety for return on investment, careful planning is required in this case. Generally, a HELOC is a better option than a traditional home equity loan. (A home equity loan is a second loan where the bank gives you a lump sum and you pay interest on it; a HELOC is a line of credit, where you do not pay the bank any money until you actually draw the money out, and you only pay on whatever it is you draw out, like a credit card)

How much down payment is needed for an owner-occupied multi-unit property?

The minimum down payment is 5% which for an owner-occupied multi-unit property. According to the article “What is the Minimum Down Payment for Multi-Unit Properties?”, this includes only 2, 3 and 4-unit properties and one of which is owner-occupied. Fannie Mae recently changed the down payment requirement which is a big deal for home buyers and investors. Current market and current condition tells that it’s more affordable to buy primary residence and investment property with down payment for multi-unit homes and multifamily property corresponding to single-family homes. The credit card, business credit cards and personal credit card can also be used for this purpose but it must fulfill minimum credit score requirement.

What are the down payment requirements for non-owner occupied rentals?

The down payment requirements for non-owner occupied rentals depends on units. According to Chris J. Gallant, these are as follows:

• The minimum down payment will be 20% and 80% is the maximum (loan-to-value) LTV with 1-2 units.
• The minimum down payment will be 20% and 80% is a maximum LTV with 3-4 units.

Can I use a HELOC for a rental property down payment?

Yes, you can use a Home Equity Line of Credit (HELOC), one of investment property loan options for a rental property down payment. According to Mark Henricks, A homeowner can use a HELOC for the down payment of the second home in their primary residence. We love this strategy – but like any credit line or credit card- use a HELOC responsibly. Ideally, you will take a HELOC out against a property that either is, or will, cash flow, to the point where it covers the HELOC payment. As long as you know you can make your HELOC payment, preferably out of the cash flow from the property with the HELOC on it- then taking money out of a HELOC one one property, to finance another property- is a a great technique, and one that we recommend and have ourselves used.

Can I receive down payment gifts for a rental property purchase?

Yes, you can receive down payment gifts for a rental property purchase. According to Emily Starbuck Gerson, you can accept gift money from any source which is not a part of the agreement with your lender or real estate agent. Gift funds can be executed for an elective down payment, closing costs, or to cover the funding fee if you want to exclude from financial circumstances. It helps in rental property management. It is one of the good investment property loan options and also reduce loan volume.

Are there any government programs for rental property down payments?

Yes, there are government-backed loan programs for rental property down payments. According to Nichole Stohler, some government-backed rental property loan programs offer small down payment for eligible buyers to help them in buying raw land, patch of land or rental property . In addition to, some grants may be available which depends on your location and circumstances. The low income borrowers mostly apply for government programs as it reduces the financial risks. These programs include different investment property loan options which are FHA loans, VA loans, USDA Loans, State and local programs, SBA loans. Each option has their own classified loan agreement. There are several eligibility requirements for government programs, qualifying depends on financial stability and other factors. Low-income borrowers can benefit from payment assistance programs.

What is house hacking and how can it help with a rental property down payment?

House hacking is a classic strategy which includes purchasing of a property, living in one portion and renting out the remaining to tenants. Then the rental income which is provided from potential tenants is used to counterbalance the owner’s expenses like mortgage insurance, property taxes, and insurance premiums. According to Rene Bermudez, approaches to house hacking can be helpful to avoid large down payment by renting out part of your own home. This approach facilitates you to use government-backed loans with low down payment requirements without sharing any space with potential tenants. This strategy is best for borrowers who are stretching to make payments, but in reality, there are many investor minded folks who will do house-hacks, even though they don’t have to- they simply like the idea of a tenant paying part of the mortgage instead of being stuck with the whole bill themselves. We at BTRE are avid fans of house hacking. Learn more about it HERE.