An investment property can be a steppingstone to a brighter financial future. However, itâs important to know that youâll need to make a larger down payment than you do when buying a home to live in. Read more to find out how much of a down payment you need to buy an investment property and how to get that money.
Buying an investment property can be a great way to get rich over time. But getting the down payment is often the hardest part for people who want to invest in real estate. How much do you really need to put down when you buy a rental property?
The short answer is that the minimum down payment is typically 15-25% of the purchase price, but there are creative financing strategies that may allow you to put down less. Let’s take a closer look at down payment options for investment properties.
Conventional Down Payment Requirements
The usual down payment for an investment property with a conventional mortgage from Fannie Mae or Freddie Mac is
- 15% for a single-family home
- 20-25% for a 2-4 unit multifamily property
The rationale is that lenders view investment properties as riskier than primary residences, so they require a larger down payment buffer.
Putting down less than 20% will also trigger private mortgage insurance (PMI), increasing your monthly costs. However, once you reach 20% equity you can request PMI removal.
FHA and VA Loans
Certain government-backed loan programs may offer more flexibility:
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FHA loans allow down payments as low as 3. 5% for owner-occupied properties. You can turn it into an investment property after a year of living there and still keep the FHA loan.
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USDA and VA loans require 0% down for eligible borrowers. Again, house hack for a year before renting out fully.
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FHA also insures investment property loans requiring just 15% down.
The catch is that you’ll pay mortgage insurance for the full loan term with FHA.
Portfolio & Hard Money Lenders
Portfolio lenders offer investment mortgages with as little as 20% down, and they may let you borrow the money for the down payment.
Hard money loans for fix-and-flips can go as low as 10%, but often charge higher rates and fees.
Building relationships with these lenders can open up more financing flexibility.
Lower Down Payment Strategies
If you want to minimize the down payment, here are some creative options:
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House hack – Live in one unit of a 2-4 unit property while renting the others. Use an owner-occupant loan.
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BRRRR method – Pull your down payment back out after renovations via a cash-out refinance.
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Cross-collateralization – Use equity from another property instead of a down payment.
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Owner financing – Negotiate seller financing for the down payment.
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Borrow down payment – HELOC, retirement funds, unsecured business lines of credit.
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Partner investing – Pool funds with others to raise the down payment.
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Improve credit – Higher scores unlock better loan terms and lower down payments.
Weighing the Down Payment Options
Aim for 20% down if possible, for these benefits:
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Lower interest rates and monthly payments
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Immediate equity to prevent becoming upside-down
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Less risk of foreclosure if vacant
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Higher cash flow with less borrowed
However, a lower down payment can help you buy sooner, and alternate financing strategies let you minimize the capital needed upfront.
Evaluate your personal financial situation, risk tolerance, and real estate investing experience when deciding on a down payment amount.
Tips for Investment Property Down Payments
Follow these tips when financing an investment property:
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Shop multiple lender types to compare down payment requirements.
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Consider house hacking a multifamily to use a lower owner-occupant down payment.
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Improve your credit score – every point helps unlock better loan terms.
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Research creative down payment sources like retirement funds and private loans.
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Analyze projected cash flow at different down payment levels to optimize returns.
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Weigh the risks and rewards before using unconventional down payment sources.
The Bottom Line
While 20% down is standard for investment properties, you have options to put down less. Consider FHA and VA loans, portfolio lenders, house hacking, borrowing the down payment, or other alternate financing strategies.
The lower you go on the down payment, the higher your risks and financing costs. Run the numbers to find the optimal balance for your real estate investing goals and financial situation.
Seller Financing                                                                                                Â
Seller financing, sometimes called owner financing, can suit buyers with limited cash for a down payment. In seller financing, the property owner is the lender and collects monthly payments from the buyer. A real estate investor can talk to the seller about the terms of the loan and may be able to help you save money on the down payment.
House hacking is when you buy a property with multiple units, live in one of unit and rent out the rest. It may be possible to collect enough rent from your tenants to cover your entire mortgage payment.
The real beauty of house hacking is that you can obtain the property through a mortgage designed for a primary residence. An FHA loan will let you buy a property of up to four units with a down payment as low as 3. 5% of the purchase price.
How to Know Youâre Ready to Buy an Investment Property
If you want to invest in real estate, you should think about your finances first because it can be risky. Â.
First, make sure your finances are stable and you can afford the upfront and ongoing costs. Common costs include:
- Down payment
- Closing costs
- Mortgage payments
- Maintenance
- Tenant costs like advertising, credit checks and vacancy costs
Next, think about how much time you have. Investment properties usually arenât passive. You be on call for repairs and will need to find and screen tenants for vacant units. That all takes time.
You can hire a management company to help but they will charge you 5% to 10% of the monthly rent.
Finally, look at the numbers to make sure the investment property makes sense. Consider how much youâll collect each month in rent, then subtract your costs. Hopefully, the home will appreciate but you also want to produce a positive cash flow. In places where homes are expensive, that might not be possible because rents might not bring in enough money to cover your costs.
Discover mortgage options that fit your unique financial needs.
Refinance your mortgage to have more money for what matters.
Use your homeâs equity and unlock cash to achieve your goals.
How to Buy a Rental Property with 5% Down (Sneaky Tactic)
FAQ
What is the lowest down payment for an investment property?
The minimum down payment for an investment property generally ranges from 15% to 25% of the purchase price. However, some loan programs, like FHA loans, allow for lower down payments, potentially as low as 3. 5%.
Can you put less than 20% down on an investment property?
While you can expect to put down 20% or more for homes with more units, you may also be able to part with as little as 3. 5% – 5% of the purchase price if you …Feb 5, 2025.
What is the minimum deposit for an investment property?
Your deposit You’ll typically need a 20% deposit to buy an investment property. This can come from your savings or equity from your existing home. Learn how to supercharge your savings and use equity to buy an investment property. If you don’t have a full 20% deposit, you can take out Lender’s Mortgage Insurance (LMI).
What is the 2% rule for investment property?
Real estate investors often use the 2% rule to figure out how profitable an investment property might be. Simply put, the 2% rule states that a rental property should generate monthly rent that is at least 2% of the total purchase price.