Many people dream of earning a second income with the help of investment properties. Acquiring an investment property or two can be a great way to grow your long-term income and can set you on the path towards financial freedom. To get started, you’ll just need to find a great property and save up for a down payment.
Down payment requirements for investment properties are different from residential properties. In addition, they’ll vary depending on the type of investment property you’re purchasing.
If you’ve been wondering how much you’ll need to get started on building your real estate portfolio, this guide will walk you through the upfront costs and requirements.
Down Payments for Rental Investment Properties
Unlike residential properties, investment properties aren’t covered by mortgage insurance, which leads to stricter down payment requirements.
In general, most investment property lenders will expect at least a 20% down payment in order to approve your commercial loan. This is very different from the 3.5% down payment requirement the home you live in might have required (for an FHA loan).
While 20% is standard for most rental property investment loans, some lenders and property types might require more money up front. Multi-family properties and apartment complexes, for instance often require at least 25% down.
Down Payments for Commercial Investment Properties
Commercial investment properties are rented out to companies, rather than residents. These types of properties could be offices, shops, retail malls, or warehouses. The down payment requirements for commercial properties is typically higher than rental properties.
Most commercial investment properties will require a 25% down payment, though there are some lenders who will accept 20%. However, it’s always better to put more down if you have it available. You can also raise money for the down payment if you don’t have enough capital to fund it on your own. Crowdfunding is an excellent way to secure the funds needed to purchase your commercial rental space.
Down Payments for Mixed-Use Properties
Some rental investment properties are referred to as “mixed-use” when they have both residents and companies residing inside of them. Apartment complexes housed on top of retail stores, coffee shops, and eateries are examples of mixed-use properties.
When securing a mixed-use loan, most lenders will request between 20 to 25% for the down payment. There are different types of mixed-use loans (government-backed, commercial, and short-term) and some lenders require the investor’s business to occupy just over half of the building.
Why Larger Down Payments Are Beneficial
When you purchase an investment property, you’re taking on risk as a landlord. You’ll want to be sure you can comfortably afford your mortgage payments, so having a smaller payment will be beneficial.
If you can put down 5% more than the required down payment on your rental property, you’ll help yourself out in the long run. A larger down payment will ultimately save you money on interest and help you lock in lower monthly mortgage payments.
In addition, putting down more money up front generally helps real estate investors lock in a lower mortgage rate, which also saves money. While 20% should be all you need, aim for 25% if you can afford it.
In some circumstances, having the financial means to put down a larger down payment can even help get you approved for financing if you are worried about being approved based on your credit or income history.
Additional Help on Investment Property Financing
While having a larger down payment is beneficial for budding real estate investors, it’s not always a requirement. There are alternative financing options available for different real estate ventures.
If you’re undecided about which type of property you want to manage or have questions about the right down payment amount for your investment, a local real estate agent can be a great resource. Finding a trustworthy agent is a valuable part of the buying process, particularly when purchasing investment properties.
A qualified agent can help you navigate through financial questions and offer advice based on their experience and knowledge of the local market. To get connected to a real estate expert with investment expertise, reach out to a Clever Partner agent.