How Much Down Payment Do I Need For An Investment Property?
Real estate is a long-term game. Investing in real estate can prove to be very lucrative if you follow smart principles while financing your investment property.
For real estate investment, the first step is to secure a down payment. Investment properties usually require a substantial down payment before they are approved for sale. There may be other stringent requirements for approval as well. The amount of down payment depends on several factors, such as:
- whether the property will be occupied by the owner or not
- the type of property you are buying
- your credit history and
- the type of financing you want to finance your purchase
Minimum Down Payment
Nowadays, you will require at least a 20% down payment for investment properties. They also have more strict approval requirements. If the property is bought for rental purposes, there is no option for mortgage insurance as well.
The most common requirement is a 20% down payment to secure traditional financing from a lender. However, larger down payments, such as 25%, can give you more advantage in securing the property. It also provides banks more security against losing their investment. A larger down payment also allows you to avoid any default insurance premiums or CMHC fees and qualifies you for better interest rates.
The requirement of a 20% down payment is imposed on people who are not planning to occupy the house themselves or are investing in a property with more than four units. Therefore, it is better to have this amount on hand before agreeing to any contract. It is important to note that every investor and property has its own set of considerations. Before making any major decision, it is better to consult with a licensed mortgage professional.
Lower Down Payments
In some cases, you might be able to evade the larger down payment requirements. You can even buy an investment property with just 5 to 10% down payments. However, certain criteria must be met. If you are planning to occupy the property yourself or are investing in a property consisting of a maximum of four units, then you can be offered a lower rate.
Moreover, the property in question must be of less than $ 1 million in value. For example, if you are purchasing a side-by-side duplex with 2 units and are planning on living in one unit yourself, then you would be eligible for a down payment of less than 20%.
If you are eligible for a lower down payment, exactly how much you will need to pay depends on the price of the property. For properties under $500,000, the minimum down payment requirement is 5%. For properties more than $500,000 but less than $1 million, the down payment requirement is 5% on the first $500k and then 10% on the remaining amount.
Properties over a million dollars require a larger down payment of about 20%, as previously discussed.
Sources for Getting Your Down Payment
You may be able to obtain the required down payment through several options like bank financing, personal loans, or borrowed funds. Real estate investors often look to invest in properties when they have a substantial amount of personal savings on hand. Others may have a secured line of credit if they have equity in other properties.
Taking bank loans may also be considered if you have enough income to meet your debt obligations and can pay the interest charged as well.
In some cases, you can even ask the seller to finance your obligations and provide collateral from another property that you have ownership of. Some investors also revert to house hacking to lower their down payment requirements. You can buy a house, live in it and rent out the additional units to hack down the cost. The rent you get can be used to pay the mortgage on the property as well.
Another option is to take a personal loan from family or friends. You can also ask them to be your investment partner and share the monetary obligations among yourself.
How Can You Reduce the Cost of Your Investment?
Investment properties that have been completed do not leave room for significant price adjustments. Therefore, if you want to make your investment more affordable, you should try to purchase a new property. It allows you to adjust the cost of the investment property according to your budget. You can also try to increase the number of rental units on the property to maximize the rental income.