5 Ways To Get Down Payment Money To Purchase Investment Properties

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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 CardCheck 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.

Partner Up

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.

Owner Occupy

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

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About Author

Frank L. DeFazio sells Philadelphia Real Estate and Philadelphia Condos for Prudential Fox & Roach in Center City Philadelphia. Frank is a real estate agent, investor, developer, and founder of the CenterCityTeam. Read more from Frank at his Philadelphia Real Estate Blog

10 Comments

  1. karen rittenhouse

    And, eventually you learn one of our favorites, owner financing.

    We market to free-and-clear properties (over 40% of properties in the U.S. have no mortgage) and the seller/owners carry the financing. Sweet!

    Great article, Frank.

    • Allen Singleton on

      Hello Karen,

      How do you find properties in your market that are free and clear? I am a new investor interested in utilizing the strategy of owner financing.

      Thanks!

      – Allen S.

      • Hi Allen:

        You can buy lists from online list sources. We buy a list of “free and clear” properties in our surrounding area and mail postcards on a regular basis – not sure how often but you may want to hit them a couple times a year? We proceed in our negotiations by explaining that we can pay more for their property if we don’t have to find and pay for financing. They get that. Many like not only the idea that we can pay more if they finance, but that they create a guaranteed, long-term income stream.

        To your success!

  2. I would love to hear some real life experiences from people who have partnered up. Some specific questions:

    Did you form a LLC or some other legal partnership? Do you designate early on what the long term plan is? Specifically, what happens when one partner decides to sell and the other does not want to? Also, not to get too negative, but what about a catastrophic event like death?

    I always hear that every partnership is different, but I would love to have some real world examples in regards to what has worked or not worked for other investors.

  3. Andy Teasley on

    You forgot to mention using funds from a self directed IRA. Making a loan investment from an IRA is usually a better choice than taking money out of your to buy real estate and definately better than taking a loan against your IRA.

    If you structure your deal correctly you can keep the investment simple enough to use an inexpensive trustee like theiraclub or Udirect.com rather than an overpriced trusste that will charge a small fortune to set up a “check book LLC IRA”

    I feel that when I borrow from an IRA owner and pay him 7% plus it is a win win situation with the investor getting his regular 7% interest payment every month rather than gambling on the market. or buying muni bonds at 3%

    Andy Teasley

  4. Regarding your “Owner Occupied” scenario, is it true that FHA can request payment in full on your loan if they find out it has been turned into a rental unit after you move out? Also, is it true that you can only have one FHA loan at a time; so you’d need to refi to a non-FHA loan before you try to do it again?

  5. Honestly besides partnering this article was not very helpful at all. With saving, owner occupancy and borrowing from ourself we still need to have money, which most beginners don’t have. Partnering is the only viable option given. However, I want to thank you Karen as your owner financing method did give me something viable to work with.

  6. HI,
    We are partnering up with my husbands parents to buy an investment property. 50/50 split where my husbands parents want to pay their half in cash and we’d finance ours. The problem we are running into is that there is some sort of regulation that says to be able to borrow for a mortgage the borrower must provide 100% of the downpayment requirements. How can we make this work? We would like to try to avoid putting my husbands parents on the mortgage if at all possible.

    Thanks!

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