Investing in real estate is a great way to build wealth over time. However, one of the biggest hurdles for many investors is coming up with the funds needed for a down payment on an investment property.
The amount you need for a down payment on an investment property can vary depending on several factors, including the type of property you are purchasing, your credit score, and the lender’s requirements. In general, you can expect to put down between 15% and 25% of the purchase price for a conventional loan on an investment property.
According to a recent study by LendingTree, the average down payment for an investment property in the United States is 15.4%. However, this can vary depending on the location of the property. For example, in high-cost markets like San Francisco and New York City, you may need to put down 25% or more.
It’s important to note that the down payment is just one of the costs associated with purchasing an investment property. You will also need to consider other costs such as closing costs, which typically range from 2% to 5% of the purchase price, and property insurance.
Some ways to come up with money to purchase an investment property.
- Saving Up
The most obvious way to come up with money to purchase an investment property is by saving up. This requires discipline, dedication, and a long-term plan. The key is to create a budget and stick to it, cutting down on unnecessary expenses, and redirecting the savings towards the property purchase. A good strategy is to create a separate savings account for the property and automate regular contributions to it.
- Equity from Existing Property
If you already own a property, you can use the equity in it to finance the purchase of an investment property. Equity is the difference between the current market value of the property and the outstanding mortgage balance. You can access the equity through a home equity loan or a cash-out refinance. However, it is important to consider the risks associated with using your primary residence as collateral.
- Partnering with Others
Another way to come up with money to purchase an investment property is to partner with others. This can be in the form of a joint venture or a limited partnership. By partnering with others, you can pool resources, share the risks and rewards, and leverage each other’s expertise. However, it is important to have a clear agreement in place and to choose partners who share your investment goals and values.
Crowdfunding has become a popular way to raise money for real estate investments. Platforms like Fundrise, RealtyMogul, and Roofstock allow investors to pool their money and invest in a variety of properties with low minimum investments. Crowdfunding can be a good option for investors who don’t have the capital to purchase a property outright or who want to diversify their portfolio.
- Seller Financing
Seller financing is when the property seller provides financing for the purchase instead of a traditional lender. This can be a good option for investors who have difficulty qualifying for a traditional mortgage or who want to negotiate more favorable terms. However, it is important to conduct due diligence on the property and the seller, and to have a clear agreement in place.
Not only do you need to consider the down payment, but how the property will be financed.
There are several ways to finance an investment property, including:
- Conventional loans: These are loans that are not backed by the government and typically require a higher down payment than other types of loans.
- FHA loans: These loans are backed by the Federal Housing Administration and require a lower down payment than conventional loans.
- VA loans: These loans are available to veterans and active-duty military personnel and require no down payment.
- Hard Money Lender: Loans that is secured by real property. These short term bridge loans are primarily used in real estate transactions, with the lender generally being individuals or companies and not banks.
- Cash: If you have the funds available, paying cash for an investment property can eliminate the need for a down payment and the associated interest payments.
In conclusion, the amount you need for a down payment on an investment property can vary depending on several factors. In general, you can expect to put down between 15% and 25% of the purchase price for a conventional loan on an investment property. It’s important to consider all the costs associated with purchasing an investment property, including closing costs and any repairs or renovations that may be required.
- “How Much Money Do You Need to Buy an Investment Property?” LendingTree, 25 Jan. 2022, www.lendingtree.com/home/mortgage/how-much-money-do-you-need-to-buy-an-investment-property/.
- “Financing Investment Properties: Which Loan Option Is Right for You?” NerdWallet, 23 Aug. 2021, www.nerdwallet.com/article/mortgages/financing-investment-properties-loan-option-right.
- “5 Ways To Finance A Real Estate Investment.” Forbes. https://www.forbes.com/advisor/mortgages/real-estate-investment-financing/
- “How to Finance an Investment Property.” Investopedia. https://www.investopedia.com/articles/investing/080515/how-finance-investment-property.asp
- “Real Estate Crowdfunding Platforms: A Comprehensive Guide.” CrowdStreet. https://www.crowdstreet.com/resources/real-estate-crowdfunding-platforms-a-comprehensive-guide/