Is there a way around the 20%-25% down for a rental property?

Question

I read online that you can use a seller 2nd for the down payment, but some lender told me you can't do that with a conventional loan.  Is that true or does he just not know what he's doing?   I have excellent credit and I can put 20% down, but I'd rather pay a higher interest rate and put 5% down if possible.

Theresa Harris · Answer

Only option is to use your current home as a rental and buy a new house to live in.  Live in the new house for a year or two, then turn it into a rental.  The 5% down is for owner occupied.  There may also be extra fees (eg mortgage insurance) with 5% down.

Doug Smith · Answer

Believe it or not, there have been a lot of studies on default rates and the source of down payment. The default rates for a loan where down payment funds are borrowed are exponentially higher than if the borrower puts their own "skin in the game". It might not seem like it would be, but it is.

Doug Smith · Answer

I'll answer your question directly about loans and then I will tell you the different way that we did it.

There are really two main ways to borrow for investment real estate...the conventional route like you do when you buy your home, visiting a bank (which hates to lender to smaller investors), and the types of loans that we do. Lenders like us are backed by private equity funds and we lender to those building rental portfolios (or onsey-twoseys), fix-n-flip, ground-up investment construction, and multi-family finance. If you're just buying one or two and you have strong income from employment or another business, then the conventional route is the way to go. If you don't have a lot of income outside of real estate, then people like us are great because we cash flow the project...not your whole financial picture like convential financiers do. That being said, regardless of the capital source, we're all going to want to see skin in the game. No institutional lender that I know of is going to do 95% financing on an investment property. 20% to 25% is the norm.

Now, here's now we did it. I had worked in banks for years...in mortgage, commercial lending, and private client...so I had built a very strong, formal credit background. I had financed many, many different people that became affluent from real estate while I never got started. I also have a wife that designs, builds, and renovates homes for other real estate investors. We had the skill-set, but not the capital. Through my old banking contacts, we gathered a handful of my old clients together that each ponied up $50K - $250K to put together a small "fund" (not really...just an LLC) to provide the equity capital while I used my connections in lending to obtain leverage. Once we had a few deals under our belts, we could stand on our own.

You can get creative, but if you can't do the 20%-25% down, take stock in what you bring to the table and do well. Partner up with someone with some capital that lack's your positive skill sets and do a few deals together until you can stand on your own.

Dennis Muno · Answer

So, there are some that may do 15%?? but keep in mind that lending is based on risk and the less you put down the more your risk will be, i.e., the higher your interest rate and monthly payment will be. You may be talking conventional loans but depending on lender, you could also find some DSCR lenders who will also do this.

To increase your chances of finding someone who will do such a loan product, reach out to a local mortgage broker and let them shop for you. The more lender contacts they can make, the more likely they can find some products like that for you.

Loans products that could help: FHA, Conventional loans. FHA if you can would be best. Conventional loan now are more expensive in general, than FHA(and other government backed loans).

Bear in mind if you put down less than 20% your pricing will be higher. It is still doable though. Good luck!

Nicholas L. · Answer

seller finance.  but seller finance deals are hard to find because you're looking for a certain type of seller, not a property.

but, that's why house hacking a small multi is so powerful.  low down payment and can be done serially.

Minh Duong · Answer

@Andrew Nesbitt Typically you will need to have 20-25% Down if it's a 2nd home non-owner occupied property. Now, you do have 3 options:

1. If you have a primary residence, you can potentially make that into a rental and buy this property as a primary with only 5% down. The interest will still be relatively the same as conventional loans and a lot better than investment loans.

2. You can partner up with other people who have the capital and are willing to invest with you. You can either offer a fixed return on their money (if the cash flow is really good), or you can offer an equity split on the property.

3. If you have primary or other properties with a decent amount of equity, you can do HELOC (I know some HELOC lenders that do HELOC on investments) or Cash-out Refi to pull out capital for this purchase.

Eliott Elias · Answer

Owner finance and other loan products that your lender needs to make you aware of. Get a mortgage broker who is experienced with working with investors.

Jonathan R McLaughlin · Answer

There is what is possible, and what banks want to do. Very few will want to do this. Even with a portfolio loan at a very friendly bank you would be unlikely to be allowed less than 10% of your own money to go with the participating second, which would have to be subordinated to the bank. Much more common in commercial than in residential if the property cash flows.

Zane Cress · Answer

Do you have equity in other properties? You could find a lender that would roll multiple properties together and use your equity as the down payment, no cash out of pocket. You could also find a DSCR loan product that might give you 10-15% down option, but those are harder to find these days, and the property needs strong cash flow. There are multiple ways to get a loan, start exploring and don't accept the idea that you need 20% down on a conventional loan from a lender. These are the times you need to get creative and do some research.

Is there a way around the 20%-25% down for a rental property?

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