5 min read
Many investors assume you need a 20% down payment (or more) to buy an investment property, a major financial hurdle when trying to build and scale a real estate portfolio. However, there are multiple strategies and investment property loans that require just 15% down, 10% down, or even less. In this article, we’re sharing what they are, how they work, and what you need to know before using them!
Summary:
- Traditional investment property loans require 15%-25% down, but there are a few options that could help you put less money down.
- With the house hacking strategy, you could use a low-money-down, owner-occupied mortgage for your investment property.
- With Rent to Retirement’s 5%-down financing on select new builds, investors can buy rental properties for a fraction of the typical upfront cost.
What Is an Investment Property Loan?
An investment property loan is a mortgage for non-owner-occupied properties. It can be used for long-term investments, such as income-producing rental properties, or short-term projects, such as house flips.
How Investment Loans Differ from Primary Home Mortgages
Most investment property loans require roughly 15%-25% down rather than the typical 3%-20% for primary home mortgages. They also tend to have higher mortgage rates (roughly 0.5%-1% above primary mortgages), as well as stricter credit score (680+) and cash reserve requirements (often 6-12 months of mortgage payments).
Can You Actually Get an Investment Property Loan with 10% Down?
10%-down loans aren’t the norm for non-owner-occupied rental properties, but there are legitimate ways to get close to 10% or even lower.
Rent to Retirement’s preferred lenders offer low-money-down programs, potentially helping you put as little as 5% down on a select new-build turnkey rental!
Conventional Investment Properties Typically Require 15%-25% Down
A standard conventional investment loan typically requires 15%-25% down, largely because lenders see investment properties as riskier than primary homes. If the borrower has financial trouble, they are more likely to prioritize their primary mortgage payments. Lenders also factor in the uncertainty of rental income, potential vacancies, and the added complexity of remote management.
House Hacking: Another Path to Low Down Payments
House hacking is an investment strategy where you buy a 2-4-unit property, live in one unit, and rent out the others. This allows you to get the benefits of low-money-down primary home mortgages, such as FHA (3.5% down), VA (0% down), and conventional mortgages (as little as 5% down with certain programs), but you must occupy the property for a minimum of one year.
DSCR Loans: Qualify on the Property, Not Your Income
A DSCR (debt service coverage ratio) loan is a type of mortgage that qualifies borrowers based on the property’s rental income covering the mortgage (rather than their personal income). For example, if a rental property generates $2,000 in monthly rental income and has a $1,500 mortgage payment, its DSCR would be 1.33. Down payments typically range from 20% to 30%, though they can be as low as 15%.
How Turnkey Investors Get Below 10% Down
Putting 10% down on an investment property isn’t common, but it’s possible. Here’s how you could get into a brand-new turnkey property with even less than 10% down:
5%-Down Financing on Select New Builds
Rent to Retirement offers 5%-down financing on qualifying new-build turnkey properties, well below the 15%-25% typical for investment loans. Putting significantly less money down could help bolster your cash reserves and/or allow you to scale your investments faster!
Rent to Retirement's Preferred Lending Partner: North American Financial Corp
Rent to Retirement works with North American Financial Corp to offer numerous loan programs for first-time and out-of-state investors. These include FHA, conventional, USDA, VA, DSCR, down payment assistance loans, and more!
DSCR HELOC: Leveraging Existing Equity for Your Next Down Payment
If you already own an owner-occupied home or investment property, a DSCR HELOC (home equity line of credit) allows you to pull the equity from your current property (without touching your mortgage) and use it to fund your next investment property down payment. There are multiple ways to qualify, including via the property’s debt service coverage ratio!
5 Ways to Lower Your Investment Property Down Payment
Don’t want to put 20%+ down on your next investment property? Here are five lower-down-payment options to consider:
1. Buy a Select New Build with Rent to Retirement (5% Down)
Rent to Retirement offers 5%-down financing for select new-build properties to help your cash go much further. These are low-maintenance rentals with property management and sometimes tenants already in place!
2. Partner with Another Investor
There are multiple ways to bring less money to the table with partnerships. Split the down payment so you’re each bringing 10%, or provide sweat equity—such as renovations or property management—while your partner brings the capital.
3. Use Seller Financing
Seller financing is an arrangement where the seller effectively acts as the lender. Terms can be flexible, meaning you could negotiate a lower down payment and/or other perks!
4. Improve Your Credit and DTI Before Applying
Your creditworthiness and debt-to-income (DTI) ratio directly impact the terms of your loan. If you work to improve your credit score to 720+ and minimize your DTI, you could potentially unlock the lower end of the conventional down payment range (15%).
5. Shop Financing Options
Always get quotes from multiple lenders before buying an investment property. Small or local banks and credit unions may offer significantly more flexible terms than a big bank.
Browse cash-flowing turnkey rental properties in over a dozen markets!
How to Calculate If a Low-Down-Payment Deal Still Cash Flows
A lower down payment isn’t always the right move. A larger loan balance means a larger mortgage payment, which can eat into your monthly cash flow. Make sure your rental property makes enough money to comfortably cover your debt service and expenses before committing to putting less money down!
The Basic Cash Flow Formula
To calculate your cash flow, use this simple formula:
Monthly Cash Flow = Gross Rent – All Expenses
Make sure your expenses include mortgage, property taxes, landlord insurance, property management fees, and maintenance and vacancy allowances. Run the numbers in minutes using our free rental property cash flow calculator!
Get Your Next Rental with Just 5% Down!
20% down is the standard for an investment property, but not the rule. Rent to Retirement has 5%-down financing options for qualifying new-build investments. These brand-new homes are located in some of the best places to buy a rental property, and they come with professional management, allowing you to invest remotely!
Investment Property Loans 10% Down FAQs
How Do I Avoid the 20% Down Payment on Investment Property?
There are several ways to put less than 20% down on an investment property. Use the house hacking strategy to get an owner-occupied loan, negotiate a lower down payment through seller financing, or take advantage of Rent to Retirement’s 5%-down financing on select new builds!
Can I Get an Investment Property Loan with 10% Down?
Traditional investment property loans usually require at least 15%-25% down. However, Rent to Retirement has 5%-down investment options for qualifying new-build rental properties, allowing you to put even less than 10% down.
Can I Put 15% Down on an Investment Property?
Yes, it’s possible to put 15% down on an investment property, depending on your financial profile or the income potential of the property you’re buying. If you’re using a conventional investor loan, you’ll likely need a high credit score (720+) and a low debt-to-income ratio. If you’re using a DSCR loan, the property will likely need a strong debt service coverage ratio.
What Is the Minimum Down Payment for a Rental Property Mortgage?
For a traditional investment property, you should expect to put at least 15%-20% down. If you’re able to house hack—living in one unit while renting out the others—you could get an owner-occupied mortgage and put as little as 0%-3.5% down. Otherwise, consider Rent to Retirement’s 5%-down new-build financing!