Mortgages & Creative Financing

Where Do You Get the Money for Your First Down Payment?

Expertise: Business Management, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate Deal Analysis & Advice, Commercial Real Estate, Personal Development, Real Estate News & Commentary
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After over 30 years in real estate investing, I have to admit that getting that first property was absolutely the toughest.

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Of course, it wasn’t just about being able to make the monthly payments. After all, while I had been saving up to buy my first property, I was still able to pay my rent. The toughest part, by far, was coming up with the actual down payment.

As many folks do nowadays, I graduated with student loan debt. I was also married with a child. And so, we moved in with family to save money while I studied to become an agent, as I wanted to actually get paid whenever I bought a property.

After two years of saving, we moved into an apartment. It was an affordable place, not the most I could afford, but it was the safest place to live while still saving money quickly. By having a second job (as a real estate agent), I was able to live off one check and bank the other, which is how I eventually saved up enough money.

That being said, the down payment was still tough to come up with. I often reference that many of us make most of our financial mistakes when we’re young and first starting out (between the ages of 25 and 35). I call it the “football game of life” that runs from ages 25 to 65, where those first 10 years tend to be the most crucial. Of course, since housing is usually everyone’s biggest expense, this can be an area where many of us go wrong.

Related: The Twenty-Something’s Guide to Financial Stability

Besides overspending on things like your car or housing right out of the gate, another mistake may be not utilizing leverage efficiently along the way.


FHA Loans

Of course, buying a house with an FHA (Federal Housing Administration) loan can be the most expensive way to buy a home as far as MIP (Mortgage Insurance Premium) and monthly payments are concerned, but the good news is that most first-time home buyers are eligible for one FHA loan. Also, it usually requires the least amount of cash out-of-pocket (unless you're a veteran and can qualify for a VA loan).

Let’s first look at why this is possible.

Since most first-time home buyers usually have less than 20% down payment to put towards a home as an owner occupant, FHA can require as little as 3.5% down. It is a government-backed mortgage, thus requiring the MIP that insures the loan since you would be putting so little money down. Keep in mind, this premium stays for the life of the loan unless, of course, you refinance.

The good news with FHA is that the qualifying ratios based on income and debt are a little more lenient than conventional financing, and you can also utilize a gift (or gift letter) from a relative to go towards your down payment.

My Down Payment

Unfortunately, I didn’t have anyone to give me a gift towards my down payment. My first property, a duplex in a blue-collar area, that I purchased FHA owner-occupied was still bought with very little money out of pocket. I was fortunate to be able to count a certain percentage of the rent from the upstairs rental unit towards my gross monthly income. And I was also able to build in a 2% seller assist that helped detract from some of the down payment monies that were needed. But even coming up with the difference after the assist seemed to take some time and effort.

Related: Why Investors Should Ask for a Seller Assist When Buying Property

Although at the time I did all of these things to keep my down payment low out of necessity, looking back, it was one of the smartest things I did.

Disadvantages of a Large Down Payment

Even if you’ve saved enough cash to make a large down payment, there are a few things to consider first.

For example, although a large down payment may decrease your monthly payment amount, you may want to weigh this against the mortgage interest deduction you receive with the larger monthly payment. What are the after-tax implications?

Another thing to consider when making a larger down payment is that capital is completely tied up in the property, and you don’t have access to it. If the property drops in value and you have to sell, that down payment may be completely lost.

An alternative is to save the extra cash as an emergency nest egg, or reserves, especially when you’re first starting out. Plus, doing so may help you save for the next property more quickly.


Buying Intentionally

There's an old saying that you should know your exit before making an investment, and I also believe you need to know what type of investor you are. For me, I knew that I was a buy and hold investor and my exit was to keep this first property as a long-term, buy and hold rental property. And to be quite honest, I still own this property today.

Of course, if you’re not entirely sure, a good rule of thumb is to make sure market rent is higher than your PITI (principal, interest, taxes, and insurance). That way, if you want or need to rent it out and keep it, you can.

For me, I never really wasted my down payments, as I've intentionally kept all of the properties I've ever lived in as rentals. Although it's not for everyone, very few people seem to do this. Most people typically buy a house and then sell it before buying the next one.

For me, I bought all of them with the intention of keeping them as long-term rentals. I don't know — maybe it was the real estate agent in me.

So, how did you (or will you) come up with the cash for your first down payment?

Let’s talk in the comments section below!

Since 2007, Dave Van Horn has served as president and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nat...
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    Ryan Rogers Investor from Boston, Massachusetts
    Replied almost 4 years ago
    Great article!
    Dylan Barth from Mankato, Minnesota
    Replied almost 4 years ago
    Great article, Dave. I’m currently saving for a down payment on my first property and trying to balance putting a large sum down to decrease my payments while not over extending myself in the short run. I like your perspective on not wasting your down payment when you hold long term. Also, I may be wrong but I believe FHA stands for Federal Housing Administration, not Fair Housing Administration. Can anyone confirm/deny?
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied almost 4 years ago
    Thanks Dylan! And you’re absolutely right, that’s a typo on our part! We’ll try to correct it. Best, Dave
    Lennart Nieuwland from Amersfoort, Utrecht
    Replied almost 4 years ago
    You’re correct.
    John Hanke from Akron, OH
    Replied almost 4 years ago
    Great article, will be sharing with some friends I’m getting into Investing who have been asking about how to get capital for investments!
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied almost 4 years ago
    Thanks John!
    Richie Connell Investor from Carlsbad, California
    Replied almost 4 years ago
    Yes, FHA does stand for Federal Housing Administration.
    Peter Mckernan Residential Real Estate Agent from Newport Beach, California
    Replied almost 4 years ago
    This is a great article about how to start out, and you gave real life examples of how you were able to put the down payment into the house and make sure you had enough to cover all the expenses. These types of topics can really give people and beginners the best route to start their investing career! Great job!
    James Mc Ree Rental Property Investor from West Chester, PA
    Replied almost 4 years ago
    I am a fan of larger down payments for my personal home and lower down payments for investment properties. I think there might be 2 misconceptions regarding mortgage interest and loss of down payment in the article. Alternatively, this is an opportunity for me to get more education! You get more mortgage interest deduction if you pay more interest; however, I focus on the “pay more interest” part of that situation. If I pay $100 in mortgage interest, I might get $28 back in the 28% bracket, but I also paid $72 that doesn’t come back. Paying $50 in mortgage interest brings back $14, but I only “lost” $36. Paying less interest is always a good thing, apart from looking at what you can do with the principal in other places. A small down payment provides no protection against loss if the property value drops. A $100k purchased with 5% down includes a $95k mortgage. If that property drops in value to $80k and you sell your original $5k could be construed as “protected”, but in reality your property is underwater and you still need to come up with the amount owed. Jim.
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied almost 4 years ago
    Hi Jim, Thanks for chiming in. When factoring in your primary, I think it’s a different spin depending on your goals and investment strategy – whether you’re in accumulation mode vs. preservation mode, etc. So to each his own, as they say. I look at my primary as part of my entire portfolio, especially since all of my primary residences have eventually turned into rentals as I move. And the less money I put into my primary, gives me a higher yield, more capital to leverage, and the ability to acquire other cashflowing investments sooner. Best, Dave
    Vanessa Ebosiem
    Replied 11 months ago
    Hi i am a home owner looking to buy my first investment property... i have everything else, and the numbers look good. The only thing left is a down payment, i have have of what i need. I am looking for creative ways to come up with the rest.... Any suggestions?
    Adaora Nwogbo New to Real Estate from Arlington, TX
    Replied 4 months ago
    This article was really helpful on how to approach down payment. Thanks