If you’ve got extra cash, you might consider investing that money in a rental property. Rentals can help diversify your investment portfolio and build financial stability. If you haven’t purchased a rental before, there are a few things you need to know about the down payment.
How Much You Can Expect to Put Down
Put simply, you can expect to pay more upfront for a rental property when compared to a standard home mortgage. Most rental property loans require a down payment of at least 15 percent. That’s the bare minimum, and that’s only for people with the best credit. The truth is, most people can expect a minimum down payment of more like 20—25 percent down.
You can also expect to pay more than you would for a typical home’s closing costs. Interest rates for a rental property loan will most likely be higher as well, since there’s more risk associated with a rental property investment.
How to Reduce Your Minimum Down Payment
If you want to minimize your down payment, consider a rental property with fewer units. The minimum down payment for a single-unit rental property mortgage can be as little as 15 percent. If you’re buying multiple rental units, that down payment minimum will rise as high as 25 percent.
Living in one of the property’s units will drastically expand your loan options, including options for lower down payments. You can find FHA loans that require as little as 3.5 percent down if you plan to live in the property. Living in the property may also help you qualify for down payment assistance.
Keep in Mind…
For many lenders, gifts won’t qualify as part of your down payment. That means your parents can’t help you put money down for your rental property purchase.
If you need a way to scrape up a little extra cash to meet the down payment requirements, home equity loans can count toward your down payment. If you’ve built up enough equity in the home you currently live in, you can borrow against that amount to help fund your down payment and closing costs.
This is a very basic overview of rental property down payments, but the down payment is just the beginning. If you have any questions about rental property down payments or what comes next, leave them in a comment below. And remember, I’m always here if you have any questions or are ready to get started.