Yes, if you're going to buy an investment property you're going to need a sizeable down payment. How do you come up with the money for a down payment when you want to buy an investment property? Do you have to have money to put down - are there exceptions? How much money do you have to put down on a rental property?
There are some no down payment mortgages some lenders will offer, but these are usually just additional loans - essentally a loan that covers the down payment portion of the mortgage. But there might be no down payment mortgages for first time home buyers. Again, though, if you're buying a property to rent out, the lender might require a downpayment on the loan.
Because down payments can be relatively high, you’ll need to have a sizable reserve of money or savings. There are a number of ways to come up with cash, but remember to negotiate first before you determine how much money you're going to put down on the property to secure the loan. Ideally, you'd like to put the least amount of money down as possible, unless you're able to reduce the interest rate on the loan.
Another factor that is consider when determining how much money you have to put down to secure a loan is your credit score - obviously the higher the better.
If the property is being sold by the owner, you might also be able to negotiate directly with them, rather than the bank or lender. If bargaining doesn’t work, you may want to consider the following options:
- Save, Save, Save! – There’s nothing like having a large chunk of change to make a down payment. The larger your down payment is, the smaller your interest rates will be and the larger your loans might be. As Latin dad says, “Anyone can spend money but few can save.”
- Friends or Family - You can borrow a portion of the down payment from friends or family or receive the money for the down payment as a gift.
- Cash-Out Financing – You can refinance an existing mortgage for more than you currently owe, essentially “replacing” your first mortgage rather than getting an additional mortgage, as described next.
- Second Mortgage – This is an additional mortgage taken out on top of the first. Usually interest rates are higher, and the financing period is much shorter in length.
- Credit Cards – If you have a high credit limit, you might be able to charge the down payment on one or more credit cards. This is when getting your balance down to zero really comes in handy.
- Trade Services – Maybe you can save some money if you’re able to offer a particular service instead of money. For example, if you’re a mechanic or an electrician, offer your labor in return for a lower down payment. In a sense, this could be considered bargaining, but it’s really not, because you’re offering labor that everyone else must pay for.
- Sweat Equity – This is a term used to describe the value that is added to a piece of property by the buyer. This added value is achieved through profitable renovations carried out by the buyers, hence the name “sweat equity.”
- Sell Assets – You might not want to sell that grand piano or a piece of valuable jewelry, but if you really want (or need) that piece of property, this is what you might have to do to earn more cash.
- Pledged Collateral – Sometimes you can enter an agreement whereby you pledge a valuable belonging, such as a plot of land, as collateral if you default on a loan.
- Student Loans – If you’re a student, you can take out student loans and use that money as part of the down payment (This does come with considerable risk and the interest rates might be higher)
- Life insurance policies - borrowing money from a policy that you've had for a long period time.
- Peer-to-Peer lending services - Lending Club for example.
Another option might be an FHA loan, which is not just for first time home buyers. "FHA" means the Federal Housing Administration, which is an agency within the U.S. Department of Housing and Urban Development. The good thing about an FHA loan is it doesn't require the standard 20% down payment for a mortgage.
Remember: For your down payment, if you don't put down 20% of the cost of the property then you have to pay mortgage insurance, but often some lenders will require you to put at least that much down if you're not the owner occupant of the property. The good thing though is if you put more money down you can usually get a better interest rate.
You could also tap into the following reserves. However, consider the tax issues with some of the options prior to close out an IRA or taking money out of a retirement fund:
- Retirement Funds
- Personal Savings
- Checking Account
- Mutual Funds
If, for whatever reason, you do not wish to employ any of the aforementioned tactics, you might want to consider enlisting partners, especially if there's a deal that's too go to pass up. But remember, you need to form this business plan with quality partners.