As a real estate enthusiast, you’ve likely stumbled upon the eternal question: can I buy an investment property with just 10% down? The answer may surprise you. While it’s generally thought that a 20% down payment is the norm for investment properties, there are ways to get around this requirement. In this comprehensive guide, we’ll delve into the world of low-down-payment mortgage options, exploring the pros and cons, benefits, and alternatives for investing in real estate with minimal upfront capital.
The Conventional Wisdom: 20% Down Payment
Traditionally, lenders have required a 20% down payment for investment properties to mitigate risk. This substantial upfront investment serves as a cushion against potential losses, ensuring that the borrower has a vested interest in the property’s success. With 20% down, lenders can offer more competitive interest rates, as the borrower has demonstrated a significant commitment to the investment.
However, this 20% barrier can be daunting for many aspiring real estate investors, particularly those just starting out or with limited funds. Fortunately, there are alternatives that can help you get started with as little as 10% down.
Low-Down-Payment Options for Investment Properties
While 20% is the standard, there are several mortgage options that allow you to put down as little as 10%:
FHA Loans
The Federal Housing Administration (FHA) offers mortgage insurance to borrowers, enabling lenders to offer more flexible financing terms. FHA loans require a minimum down payment of 3.5%, but they’re typically reserved for owner-occupied primary residences. However, there’s a loophole: you can use an FHA loan to purchase a multi-unit property, such as a duplex or triplex, as long as you occupy one of the units as your primary residence. This strategy allows you to invest in real estate with a lower down payment.
VA Loans
Veterans Administration (VA) loans are designed for active-duty military personnel, veterans, and surviving spouses. These loans often require no down payment at all, but you’ll need to meet the VA’s eligibility criteria. If you’re a veteran or have a military background, a VA loan can be an attractive option for investing in real estate with minimal upfront costs.
Conventional Loans with Private Mortgage Insurance (PMI)
Some conventional lenders offer mortgages with private mortgage insurance (PMI), which can reduce the down payment requirement. PMI is an insurance policy that protects the lender in case of default. With a conventional loan and PMI, you may be able to put down as little as 10%. However, keep in mind that PMI premiums can increase your monthly mortgage payments.
Non-QM Loans
Non-QM (Qualified Mortgage) loans are designed for borrowers who don’t fit the traditional lending mold. These loans often have more flexible credit and income requirements, but may come with higher interest rates and fees. Non-QM loans can offer lower down payment options, but be cautious of the higher costs associated with these products.
Pros and Cons of Low-Down-Payment Investment Property Loans
While low-down-payment options can make it easier to get started with real estate investing, there are trade-offs to consider:
Pros:
- Lower upfront costs: With a lower down payment, you’ll need less cash upfront, making it more accessible to new investors or those with limited capital.
- Increased cash flow: By putting down less, you’ll have more funds available for property renovations, ongoing expenses, or other investment opportunities.
- Flexibility: Low-down-payment options can be more flexible in terms of credit scores, income requirements, or debt-to-income ratios.
Cons:
- Higher monthly payments: With a smaller down payment, your monthly mortgage payments will be higher, as you’ll need to finance a larger loan amount.
- More risk for lenders: To compensate for the increased risk, lenders may charge higher interest rates, fees, or PMI premiums, which can eat into your investment returns.
- Potential for negative equity: If the property market declines, you may end up with negative equity (owing more on the mortgage than the property’s value).
Alternatives to Low-Down-Payment Investment Property Loans
If you’re not comfortable with the pros and cons of low-down-payment loans, consider these alternatives:
Partnerships and Joint Ventures
Partner with an experienced investor or friend who can contribute to the down payment or provide additional funding. This approach allows you to share the risks and rewards of the investment.
Crowdfunding
Real estate crowdfunding platforms allow you to invest in properties alongside other investors, often with lower minimum investment requirements. This option provides a more diversified portfolio and lower upfront costs.
Real Estate Investment Trusts (REITs)
REITs enable individuals to invest in a diversified portfolio of properties without directly managing them. You can buy shares in a publicly traded REIT or participate in a private REIT offering.
Conclusion: Cracking the Code of 10% Down Investment Properties
While a 20% down payment is still the gold standard for investment properties, it’s not the only option. With low-down-payment mortgage options, partnerships, crowdfunding, and REITs, there are ways to enter the world of real estate investing with as little as 10% down. Remember to carefully weigh the pros and cons, consider your financial situation, and explore alternative investment strategies before making a decision. By doing so, you’ll be well on your way to cracking the code of 10% down investment properties.
| Low-Down-Payment Option | Down Payment Requirement | Key Benefits | Key Drawbacks |
|---|---|---|---|
| FHA Loans | 3.5% | Lower down payment, flexible credit requirements | Only for owner-occupied multi-unit properties, mortgage insurance premiums |
| VA Loans | 0% | No down payment, low interest rates, lenient credit requirements | Only for eligible veterans, funding fees |
| Conventional Loans with PMI | 10% | Lower down payment, flexible credit requirements | PMI premiums, higher interest rates |
| Non-QM Loans | 10%-20% | Flexible credit and income requirements, lower down payment | Higher interest rates, fees, and risk |
Remember, investing in real estate requires careful planning, research, and risk management. Always consult with a financial advisor or real estate expert before making a decision.
What are the benefits of putting 10% down on an investment property?
Putting 10% down on an investment property can be beneficial in several ways. For one, it allows you to conserve cash reserves, which can be used for other investments or expenses. Additionally, putting less money down can help you diversify your portfolio by investing in multiple properties with the same amount of capital. This can lead to a higher potential for returns and a more diversified investment portfolio.
Another benefit of putting 10% down is that it can help you get into the investment property game faster. With a lower down payment, you can purchase a property sooner, which can help you take advantage of market opportunities and start generating rental income more quickly. This can be especially beneficial in hot markets where prices are rising rapidly and investors need to act quickly to secure a property.
What are the potential drawbacks of putting 10% down on an investment property?
One of the main drawbacks of putting 10% down on an investment property is that you’ll need to pay private mortgage insurance (PMI). PMI can increase your monthly mortgage payment and eat into your cash flow. Additionally, with a lower down payment, you’ll have a higher loan-to-value (LTV) ratio, which can make it more difficult to secure a loan and may result in a higher interest rate.
Furthermore, putting 10% down may limit your cash flow and increase your debt-to-income ratio. This can make it more challenging to manage your finances and may impact your ability to secure additional loans or credit in the future. It’s essential to carefully weigh the pros and cons and consider your overall financial situation before making a decision.
What types of mortgages can I get with 10% down?
There are several types of mortgages that allow you to put 10% down. One option is a conventional loan with PMI. This type of loan is offered by traditional lenders and can be used to finance a variety of property types. Another option is a Fannie Mae HomeReady loan, which is a low-down-payment mortgage product that allows you to put as little as 3% down. However, this loan has income limits and is only available for certain types of properties.
You may also be able to secure a 10% down loan through a mortgage broker or online lender. These types of lenders often offer more flexible loan options and may be more willing to work with investors. However, be sure to shop around and compare rates and terms to ensure you’re getting the best deal.
What credit score do I need to get a mortgage with 10% down?
The credit score required to get a mortgage with 10% down can vary depending on the lender and the type of loan. However, in general, you’ll need a credit score of at least 700 to qualify for a conventional loan with PMI. Some lenders may require an even higher credit score, especially if you’re an investor.
A good credit score can also help you qualify for better loan terms and a lower interest rate. If you have a lower credit score, you may still be able to secure a loan, but you may face higher interest rates and stricter loan terms. It’s essential to check your credit score and work on improving it if necessary before applying for a mortgage.
How much can I borrow with 10% down?
The amount you can borrow with 10% down will depend on the lender, the type of loan, and your creditworthiness. In general, lenders will allow you to borrow up to 90% of the purchase price of the property, minus closing costs and other fees. This means that if you’re purchasing a $200,000 property, you could borrow up to $180,000 with a 10% down payment.
Keep in mind that you’ll also need to factor in ongoing expenses like mortgage payments, property taxes, and insurance, which can impact your cash flow. Be sure to carefully calculate your financials and ensure that you have enough cash reserves to cover these expenses before making a decision.
What are the income requirements for a mortgage with 10% down?
The income requirements for a mortgage with 10% down will vary depending on the lender and the type of loan. However, in general, lenders will require that your debt-to-income (DTI) ratio is no higher than 36%. This means that your monthly debt payments, including your mortgage payment, cannot exceed 36% of your gross income.
Additionally, lenders may require that you have a certain amount of cash reserves on hand to cover several months of mortgage payments. This can vary depending on the lender, but it’s typically 2-6 months’ worth of payments. Be sure to check with your lender to determine their specific income requirements and ensure that you meet them.
Can I use a VA loan or FHA loan to buy an investment property with 10% down?
VA loans and FHA loans are typically used for primary residences, not investment properties. VA loans are only available to eligible veterans, active-duty military personnel, and surviving spouses, and require a zero-down payment. FHA loans, on the other hand, require a minimum down payment of 3.5% and are only available for primary residences.
If you’re looking to purchase an investment property with 10% down, you’ll likely need to explore other loan options, such as a conventional loan or a mortgage product specifically designed for investors. Be sure to shop around and compare rates and terms to find the best option for your situation.