Navigating Investment Property Down Payments

When determining how much to put down for an investment property, it's crucial to consider various factors, as your down payment amount can significantly impact the cash flow of your investment property. A higher down payment results in a lower loan amount, which, in turn, leads to smaller monthly mortgage payments. This can improve your property's cash flow because you have less debt to service each month. With lower mortgage payments, more of the rental income can be retained as positive cash flow.

A key consideration is the type of mortgage you choose. The down payment requirement can vary depending on the mortgage type and your financial situation. We'll break down the down payment requirements for different mortgage types commonly used for investment properties.

1. Conventional Mortgage:

A conventional mortgage is one of the most common options for purchasing an investment property. Typically, lenders require a down payment of at least 20% for a conventional mortgage on an investment property. This means that if the property's purchase price is $200,000, you would need to put down $40,000 as a down payment.

2. Debt-Service Coverage Ratio (DSCR) Loan:

Down payment requirements for debt-service coverage ratio (DSCR) loans vary, with traditional lenders typically requesting 20% to 30% of the property's purchase price. Non-bank and private lenders may offer more flexibility, but often with higher rates. Your financial profile, property type, location, loan-to-value (LTV) ratio (based on the property's appraised value), and debt-service coverage ratio all influence down payment requirements. A higher DSCR and lower LTV ratio generally result in lower down payment requirements, but DSCR loans typically entail higher down payments than residential mortgages.

3. Portfolio Loan:

Some lenders offer portfolio loans for investment properties, which are not backed by government agencies like FHA or VA. Down payment requirements for portfolio loans can vary widely, but they may require anywhere from 10% to 25% down, depending on the lender's policies and your creditworthiness.

4. Hard Money Loan:

Hard money loans are often used by real estate investors, particularly for fix-and-flip properties. These loans typically have higher interest rates and shorter terms. Down payment requirements for hard money loans can range from 10% to 30% or more, depending on the lender and the property's condition.

In conclusion, the amount you should put down for an investment property varies depending on the type of mortgage you choose. It's essential to carefully consider your financial situation, the property's purchase price, and your long-term investment goals when deciding how much to invest as a down payment.

Remember that interest rates, credit score, and other financial factors can also influence your eligibility and the down payment requirements. Consulting with a mortgage professional and conducting thorough research on the specific loan options available in your area is essential for making an informed decision.