Often would-be real estate investors are ready, willing and nearly able to dive into the real estate investing pool but they don’t have sufficient money for the mortgage down payment required by lenders. Mortgage down payments on non-owner occupied properties require 20% down for single family properties and 25% down for multifamily properties (1-4 units) if you are purchasing with a residential loan. Commercial loans require anywhere from 20 – 35% down depending on the lender and the purchase. The question then becomes how can an individual seeking to begin investing in real estate get the necessary down money to purchase a property. Here are a few ideas on how you can get the mortgage down payment money needed:
Save Your Money
Probably the most common way to get the necessary down payment is by good old fashioned saving. Everyone has a trick, like putting a small portion of each paycheck away, or skipping out on that morning latte (not recommended!). Consider taking a second job, work nights/weekends, If you’re handy you can do handyman work which will help you become acquainted with the types of issues you’ll face as a landlord. If your job pays an annual bonus and it’s large enough you could use that, either way you get the idea, save up enough money and use it to purchase an investment property.
If your budget or income doesn’t afford you the opportunity to save a large down payment there still may be options available to you.
Borrow From Yourself
- Retirement Savings – Certain types of retirement plans allow you to use money you’ve saved to purchase real estate without penalty. Before making any withdrawals consult a tax attorney or account and recognize that you may have to occupy the property for some period of time in order to make the tax free withdrawal.
- HELOC, Home Equity Loan – If you’re lucky enough to have paid down or maybe even paid off another property you can use the equity you have in that property to purchase an investment.
- Credit Card – Check with your lender but you may have to take a cash advance and deposit into account and let it season for at least 60 days.
Borrow From Family/Friends
Often prospective buyers can borrow money from friends and family. You will want to check with your lender about what gift requirements, if any, exist.
Partnering up is another way an investor can get the down money necessary for purchasing an investment property. Often investors split costs and profits 50/50 but there is nothing from stopping partners from agreeing on a different arrangement. For example one partner could put up all or most of the down money while the other partner puts down little or none. The partner who put down less money might be responsible for things like property management, maintenance, reporting, and might collect say 25% of the profit while the other partner collects 75%. Partnership agreements are extremely flexible and can be tailored to fit any situation.
It’s probably worth noting again (see my previous posts) that investors who purchase single or multifamily investment properties and owner occupy them can take advantage of 3.5% down for an FHA loan and 5% down for conventional.
As you can see there are several ways to come up with the mortgage down payment money you’ll need to purchase an investment property. You can save your own money, borrow from yourself or others, find a partner or lower the down payment owner occupying the property. Hopefully these ideas will help you jump over the down payment hurdle and get moving on your real estate investing career.
Photo: 401(K) 2013