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Real estate investment properties offer passive income, appreciation, landlord tax deductions, and diversification for your investment portfolio. So why doesn’t everyone become a landlord?
Yes, it takes skill to find good deals on properties, and some labor to manage rentals. But the real hurdle for most people is the hefty down payment for an investment property.
So how do you shrink that down payment? What’s the minimum down payment for an investment property that you can make?
9 Ways to Lower Your Down Payment on Investment Properties
Technically, the minimum down payment for an investment property is 0%. But more likely, you’re looking at a down payment between 5-25%.
Try these strategies for the lowest down payment on an investment property possible.
1. Move in for a Year
If you move into the property yourself and live there for at least a year, you qualify for an owner-occupied mortgage. Fannie Mae offers traditional loans with as little as a 3% down payment loan for investment properties — or at least properties that will be used as investments eventually. You could even use a 0% down payment options like the NACA program, USDA loan program, or a VA loan to buy an investment property if you move in for a year (assuming you meet the program requirements).
Alternatively, you could also borrow an FHA loan if your credit has some dents and scratches. With a credit score of at least 580, you can qualify for a 3.5% down payment.
Regardless of the loan type, if you make a down payment less than 20%, expect to pay for mortgage insurance. You can remove private mortgage insurance (PMI) from conforming loans once you pay the balance below 80% of the property value, but FHA loans require you to keep paying mortgage insurance for the entire life of the loan. That leaves a higher monthly mortgage payment, and slimmer monthly cash flow.
While living in the property, you can house hack by renting out rooms, adding an accessory dwelling unit (ADU), renting out storage space or parking, or renting the property on Airbnb when you’re not using it. Deni even house hacked by hosting a foreign exchange student!
After a year, you can move out and keep the property as a rental, leaving your low-interest mortgage in place.
Just beware that conventional loans not only report on your credit, but also cap how many loans can report on your credit before you no longer qualify. So, you can only house hack a few investment properties before reaching the conventional mortgage ceiling.
2. House Hack a Multifamily
Properties with up to four units are considered “residential” in the US, so you can buy them with a conventional mortgage. That lets you buy a multifamily property with up to four units as your primary residence, move into one unit, and rent out the others to cover your mortgage payment.
You can even use the future rental income from the other units to help you qualify for the loan. You’ll also enjoy better loan terms, lower mortgage rates, and lower monthly payments. All of which leads to more monthly cash flow for you as a landlord, even after you move out.
Sometimes conforming loans require a higher down payment on multi-unit properties than single-family homes, but it varies by loan program. Compare quotes through Credible for multiple loan options.
If you want to crunch the numbers on a potential house hack, try our free house hacking calculator.
3. Borrow the Down Payment
Whether from a HELOC, home equity loan, personal loan, or private loan from friends or family, you can borrow the down payment on an investment property. At least when you take out a portfolio loan from a private lender — conventional lenders don’t allow any part of the down payment to be borrowed.
Portfolio lenders typically require you to put 15-25%. If you already have real estate equity, you can open a HELOC to borrow that equity as a down payment for a new investment property. Keep in mind you can take out HELOCs against your rental properties, not just your primary residence.
Better yet, draw on an unsecured business line of credit or card. Use Fund & Grow to open a series of unsecured business credit cards and credit lines, which often come with 0% initial interest rates and only 2.5% in cash advance fees if you use a service like Plastiq.
Alternatively, you could always ask your friends and family to borrow part of the down payment. They won’t report to the credit bureaus, and won’t break your knee caps if you default. Probably.
Just make sure you have a strong track record of high returns and cash flow with your existing properties, before putting your personal relationships on the line. If you fail to pay as promised, you risk alienating your closest friends and family.
You can also borrow against your workplace retirement accounts such as a 401(k). But you’re borrowing against your future, so only do this after you’ve done a few successful deals. You can even pull money out of your IRA temporarily, but you need to put it back within 60 days or the IRS slaps you with a 10% penalty for an early distribution.
Check out Visio, Kiavi, and LendingOne as reputable portfolio lenders. All have a quick loan application process and closing turnaround time, and the more experience you have as a real estate investor, the more favorable loan terms you’ll get.
You can also get an instant quote on a down payment and interest rate from Lendency right here:
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