If you’re wondering — should I put 10 percent down on an investment property — you may be shocked to learn that a typical down payment on a rental property is 15-25%. While a sizable deposit is standard when buying an investment property, it’s not cast in stone. Some dedicated mortgage programs help you get started in real estate investment with way less.
Federal Housing Authority (FHA) loans, Veteran Affairs (VA) loans, and special programs such as Home Possible and HomeReady can help you buy an investment property by putting 0 to 10% down. You can use them to finance a multi-unit property, and some of the loans have an owner-occupant requirement.
How Much Should I Put Down on an Investment Property?
Ideally, you’ll need at least 15% down if using a standard mortgage to finance the purchase. However, FHA and VA loans and other special programs, allow you to buy an investment property with as little as 3% down.
While a bigger deposit is better, the ultimate choice comes down to your financial situation. Raising a sizeable deposit when purchasing an investment property helps lower your risk profile, and your lender may reward you with better terms and rates.
While it’s tempting to take up a lender on their lowest deposit amount, it may not always be the wisest option. For the best experience when buying a property experience, you should work backward. Use the property’s projected rental income to determine the monthly income and match the figure to your monthly mortgage payments.
Here are three top considerations to help you determine the size of your down payment when buying an investment property.
Loan Requirements and Interest Rates
Lenders will hold you to higher lending standards when seeking an investment property loan. They usually require a sizeable down payment and charge higher interest rates because such loans carry greater risk and have a higher defaulting rate.
Investors often rely on their rental income to cover their mortgage payments. However, rental income may fluctuate due to potential vacancies and tenant turnover rates. That drives lenders to perceive investment properties as risky investments.
Alongside your creditworthiness, lenders may use the size of your down payment to determine the size of your loan and the interest rate. Due to the stricter lending standards, a larger down payment is preferable. It can help you qualify for a bigger loan, secure better terms, and lower interest rates.
The interest rate you secure has a twofold effect on your down payment decision. First, high interest rates result in higher monthly payments, increasing your cost of borrowing. Secondly, the interest rate determines the amount of financing you can secure, which affects the size and type of property you can purchase.
Raising the size of your down payment may help improve mortgage eligibility and help you secure the amount you need to purchase an investment property.
Cash Flow and Return on Investment
Analyzing a rental property’s cash flow and its potential return on investment (ROI) can help you determine the ideal deposit amount. Thoroughly investigate the area’s rental market and generate an accurate estimate of the unit’s potential income and expenses.
You may then use the rental income to benchmark the monthly payments on your mortgage. You can adjust the down payment amount to help you secure a mortgage that fits within your budget.
Typically, a larger deposit lowers your monthly payment and increases the property’s cash flow and ROI. Positive cash flow is highly desirable in an investment property since it affects your financial stability. You can easily cover all property expenses, including mortgage, property taxes, insurance, and maintenance costs.
A smaller down payment may reduce the cash flow since the mortgage payments may gobble a large portion of your rental income. You may struggle to cover unexpected expenses or vacancies with a negative cash flow, and the property may take longer to be profitable.
Risk Tolerance and Financial Goals
Risk tolerance refers to your capacity to handle potential losses or fluctuations in your investment. Defining your risk tolerance — low, medium, or high — allows you to pick a down payment that matches your risk appetite. A large deposit reduces the loan-to-value ratio (LVT) to give you more equity in the property while lowering the debt level.
A lower LVT provides a sense of security and lowers your vulnerability to market volatility and downturns. It is ideal for a conservative real estate investor.
Conversely, a smaller down payment comes with a higher loan-to-value ratio, lowering your equity in the property. It can potentially raise your mortgage payments and interest rates, increasing your debt burden. However, raising a smaller deposit can help you retain more liquidity and spread your capital across different investments. It’s an ideal choice for seasoned investors with a high-risk appetite.
Your financial goals also matter when considering a down payment amount. A larger down payment is ideal if you wish to maximize cash flow since it can lower your mortgage payment. On the other hand, a smaller deposit is preferable if you want to diversify your portfolio and maintain liquidity.
Get Your Dream Property Today
You don’t need a sizeable deposit to purchase a real estate investment property. Some loan programs let you get started by putting 10% or less down. Partnering with a skilled realtor can help you make the right choice.
Looking to buy an investment property and need someone for rental property management? If you need rental property management in the Greater Greenville, South Carolina area or rental property management in Charleston – let us know.