While you may be able to buy your primary home with little or no money down, you’ll typically need to put down at least 15% if you want to purchase a rental property. And with the median cost of a house hovering around $399,000, that comes out to nearly $60,000. This hefty chunk of change is a huge reason why it can be tougher to break into real estate investing than it is to buy a home you’ll live in.
But that doesn’t mean you don’t have options — we’ll cover strategies for raising a large down payment and ways you can side-step that steep minimum requirement.
In most cases, the minimum down payment amount for a conventional investment property loan is 15%. However, several factors will determine your actual down payment requirement, including your credit score, debt-to-income (DTI) ratio, loan program and property type.
How to avoid a large down payment on an investment property
If you want to avoid the large down payment that comes with investment property loans, you could also use a real estate investment strategy known as house hacking. This involves renting out part of the property you live in, whether that looks like taking on a roommate, renting out your basem*nt or getting tenants into an accessory dwelling unit (ADU) in your backyard.
House hacking is a more accessible way to buy a rental property, because you can use a government-backed loan that only requires a 0% to 3.5% down payment. You can even buy a multifamily home, like a duplex or triplex, so you don’t have to cohabitate with your renters. The table below summarizes the down payment requirements for rental property loans.
| Occupancy type | Loan program type | Minimum down payment |
|---|---|---|
| Investment property | Conventional (single family) | 15% |
| Conventional (multifamily) | 25% | |
| Owner-occupied (“House hacking”) | FHA (up to 4 units) | 3.5% |
| VA (up to 4 units) | 0% |
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Conventional loan down payments
→ You’ll likely need at least a 700 credit score to qualify for a 15% down payment for a conventional loan on a one-unit investment property. However, if you have minimal debt and/or a high income, you may be able to qualify with a credit score as low as 680. In those cases, your DTI ratio must be 36% or lower.
→ You’ll need a 25% down payment for an investment property with two to four units.
Read more about minimum mortgage requirements.
What about vacation homes?
If you plan to buy a vacation home, in most cases, you’ll be required to make a minimum 10% down payment. Fortunately, you can also use the home as an investment property, but the income it generates won’t be included in your loan qualification calculations.
As long as you live in your second home for either 10% of the time it’s available for rent or more than 14 days — whichever is longer — IRS rules allow you to use the home as a rental property and deduct your rental expenses.
Government-backed loan down payments
→ You can use an FHA loan to buy an investment property with up to four units with as little as 3.5% down, provided you occupy one of the units as your primary residence.
→ If you’re eligible for a VA loan, you can purchase a one- to four-unit property with a 0% down payment. One of the units must be your primary residence.
3 reasons to make a larger down payment when buying a rental property
Although some government-backed loans allow you to purchase a rental property with little or no money down, many people choose to pay more. Here’s why:
- It can reduce borrowing costs. The lower your loan-to-value (LTV) ratio (i.e. your outstanding mortgage balance compared to your home’s value), the lower your interest rate and loan fees will likely be.
- You might save on insurance costs. If you don’t make at least a 20% down payment, you may have to pay costly mortgage insurance premiums. But if you can scrape together a bigger down payment, you stand to save thousands.
- You can reduce your monthly payment. A larger down payment ultimately means lower monthly payments for the same home.
Here’s an example: Let’s say you want to buy a $350,000 rental property using a 30-year fixed-rate conventional loan with a 7% mortgage rate. The table below shows how your down payment amount impacts your monthly payments and interest fees.
| LTV ratio | Loan amount | Down payment | Monthly payment | Total interest |
|---|---|---|---|---|
| 95% | $332,500 | $17,500 | $2,385.31* | $463,867.09 |
| 80% | $280,000 | $70,000 | $1,862.85 | $390,624.92 |
*Monthly payment amount includes mortgage insurance premiums.
Need help understanding how to calculate LTV? Check out our article on loan-to-value ratios.
Lenders compare your debt and income to determine how large a monthly payment you can afford. They’ll divide the total amount you pay toward debt each month, including the loan you’re applying for, by your gross monthly income to get your debt-to-income (DTI) ratio.
Different loan programs have different DTI limits:
| Conventional | 45% |
| FHA | 43% |
| VA | 41% |
Don’t forget ongoing expenses
Don’t forget to factor in ongoing rental property expenses when figuring out how much you can afford. These may include but aren’t limited to:
- Landlord insurance
- Property taxes
- Maintenance and repairs
- Property management fees
- Vacancies
- Utilities
Can I get a loan based on rental income?
Lenders typically add 75% of what you’re expecting to earn from tenants to your gross monthly income when evaluating your loan application. They’ll either evaluate the property’s rental history or consider market rents in your area to come up with a reasonable estimation of rental income.
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Investment property loan requirements
To get approved for a conventional investment property loan, you’ll need to meet the following loan criteria:
A minimum 15% down payment
If you’re buying a multifamily property as a primary residence and going the house-hacking route with a government-backed loan, your minimum required down payment could be less.
A minimum 700 credit score
Unless you plan to make an investment property down payment of 25% or more, you’ll need at least a 700 credit score. To get quoted the best mortgage rates, though, improve your score to 780 or higher.
A maximum 45% DTI ratio
The percentage of your gross monthly income that is used to pay your monthly debt can’t exceed 45%.
A minimum of six months in reserves
You’ll likely need at least six months in cash reserves to buy an investment property. Your lender wants reassurance you can continue to pay the mortgage when you’re in between tenants.
Arguably, though, the most important of these factors is your down payment amount. While your credit score, DTI ratio and savings hold weight, how much money you put down can make or break your real estate investing goals.
1. Tap your home equity
If you have at least 15% equity in your primary residence, you could use your home equity to buy an investment property. You’ll take out a home equity loan, home equity line of credit or use the proceeds from a cash-out refinance as a down payment for a rental property.
2. Try owner financing
Instead of going through a traditional mortgage lender, you could try to arrange an owner financing deal with the home seller. You’d make a repayment agreement directly with the seller and sign paperwork giving the seller the right to foreclose if you fail to pay the loan.
3. Create a self-directed IRA
If you convert an individual retirement account (IRA) or 401(k) into a self-directed IRA (SD-IRA), you can invest in real estate using your retirement funds.
4. Invest with a group
Real estate investing groups (REIGs) allow small groups of people to pool their money and invest together. REIG members typically share the labor of managing the properties they own and the income earned.
5. Save over time
This option can take the longest to achieve, but it’s tried and true — and doesn’t involve taking on further debt.
