How much to put down on rental properties?

23 Replies

Is there really a point to trying to avoid PMI? For example. I'm looking at breaking into RE investing through long term rentals, starting w/ houses around $100k and renting for $1250-$1500. Is it worth me putting down 20% just to avoid PMI? Or should I just go with the lowest amount possible for a down payment to get approved for a mortgage. I have about $30k to invest with. I'd like to keep $3,000 for closing costs and $5,000 for emergencies. I figure I could do 1 house this year at 20% or possibly 2 houses at 5%. I have perfect credit and an extra $1,000 a month I can do whatever with after bills, investments, and fun money.

The simple answer is "as little as possible".

PMI is only an issue on conventional mortgages... and on conventional NOO mortgages, you won't get away with less than a 20% down payment to have to worry about it. For a single family you'll generally have to put 20% down, on a multifamily (2 - 4 units) it's often 25%.

There are other financing options available that don't require the same down payments, but as said PMI wouldn't be an issue either.

So are you saying that if I'm purchasing a rental property I'll have to come up with 20% to be considered for a mortgage?  What if I buy a homepath property that only requires 10%?

@Eric P.  

20% down payment. PMI on "investment" mortgages can be pretty high and detioriate cash flow quickly.

Okay, so if I were to focus on some HomePath properties that only require 10% down would that be a better option?  

@Eric P.  

Talk to your lender for specifics. Those 10% HomePath deals are nice, but they are usually scooped up by pros in my area. I'm not sure if they still require PMI or not, but if they do it will be costly.

I was recently asking the same question to my mortgage broker.  Last September I found a few options for purchasing investment properties with a 15% down payment.  In my case I was looking to finance the purchase of a $150,000 property.  The monthly mortgage insurance (MI) payment for this loan would have been ~$75/month.

So yes, it's possible to get an investment property mortgage for less than 20% down, but it will have an impact on your cash flow numbers.

In my case I ended up placing the traditional 20% down on the property.  I'm also adding a third bedroom, which immediately increases the rents and the resale value. The longer term plan is to do a cash-out refinance at some point in the next two years.

Be sure to run the numbers for both 20% and 15% down and against one and two properties.  You may be able to purchase two properties at 15% down, but you may not feel comfortable with the impact on your cash reserves and/or the cash flow coming from each property.  This really comes down to your risk tolerance and your financial capacity.

What is "expensive" If its $100 a month and I'm getting $300 cash each month I'll have $200 left over. Once 20% of the loan is payed I can refinance eliminating PMI correct?

I'd rather have 2 houses paying me $200 each a month after PMI rather than 1 house bringing in $300 and no PMI. This will also help build my net worth.

I like the idea of these 10% homepath properties because if I'm looking for something around $100,000 I can put $10,000 down, have $2,500 for closing and $5,000 for emergencies which means in about 6 months to a year I'd be ready to purchase my next place. If I put $20,000 down on a $100k house that means I wont be able to buy another place PMI free for at least 3 years with my current finances.

@Eric Popso though Homepath properties only require the 10% down payment, they also have significantly higher closing costs, including the buyer paying 100% of all transfer taxes.  I purchased a Homepath property with 10% down, and if I had to do it over again, I would have just bought a similar property at 20% down and more normalized closing costs.  The extra money would at least be there in equity instead of disappearing into the nothingness of closing costs.

Russell Brazil, Real Estate Agent in Maryland (#648402), Virginia (#0225219736), District of Columbia (#SP98375353), and Massachusetts (#9​0​5​2​3​4​6)
(301) 893-4635

Bought a homepath property for 41k had to put 10% down and closing cost were around 4k. I used Wells Fargo and I'll never use them again. You would think I was making a 1million dollar loan with all the information they needed.

@Eric P.  I thought they stopped the homepath mortgages?

(504) 228-1389

@Russell Brazil that's a really great point about the extra $ being in equity rather than just gone.  I live in NJ and am focusing on places in South Jersey.  Anything cheaper than $100K starts to get into questionable neighborhoods I wouldn't be comfortable with.  So I guess I'm just better off continuing to save and look at that 20% or maybe the 15% Mike was talking about.

This is all very helpful. So far I'm finding its likely best to stick with a standard house with a standard mortgage not try to get fancy with Homepath or anything. Then I just need to run the numbers and decide if its worth putting down 20% to avoid PMI or see if I can put less down, pay PMI, allowing me to purchase more property faster.

PMI is the devil

Paying PMI is introducing a non-necessary expense which can be sticky. I would look for any other option to avoid paying it.

No you should not worry about PMI the less you put on the down payment the higher the ROI. You can only get 5% down conventional for owner occupied homes. Any investment property that is not owner occupied will require 20%. PMI is a good tool for beginners that don't have a lot of start up capital. You would not be able to get two owner occupied loans in one year because typically there is one year occupancy requirement before you can rent out the unit.

I would invest the 30k in one owner occupied home and use the remaining cash for another rental. Or you could keep it for repair costs. I think homepath was eliminated earlier this year I have not seen any of those deals recently.

@joseph Can I get an owner occupied loan and rent that home without having ever lived in the home?  I'm a little confused.  

@Eric P.  To get an owner occupied loan at 5% down you must occupy the property as your primary residence for a year. Some lenders require more time than that but typically it is a year. You need to read your own loan docs but for the ones I have had it states that you must occupy the property within 60 days of start of loan. If you don't meet these requirements it is considered mortgage fraud and you get yourself in some hot water.

Anyone know if 80/10/10 piggyback mortgages are doable for rental property?  I'll likely already have an 80/10/10 this year for my primary residence.  Its not easy coming up with a Down payment for your primary place in NJ and have enough in the bank for emergencies and trying to come up with another down payment.  

I believe fannie did away with the homepath loan but replaced it with the HomeStyle Renovation Loan. You'll want to verify all of this, but from what I read the HomeStyle loan is a conventional loan so you won't pay PMI if you put 20% down or you could put 10% down and only pay PMI until you reached 20% equity. You can choose a fixed term or ARM, finance all the repair costs and it's open to investors not just owner occupied but only 1 unit for investors, owner occupied can finance multi's as well.

I hate PMI like you do and have never paid it; BUT you have to crunch the numbers and if you work hard and get the best deals; you can get the numbers to work to purchase even with PMI. I can't stand paying PMI so I would keep looking for a better deal that you have to pay PMI and you are still positive cash flow OR find a deal that you put more down to avoid it.

Did you end up buying in SNJ?

@Eric P.

For a rental property, the minimum down payment is 20 percent of the sales price but if you put 25 percent you’ll get slightly better terms. You can also expect your interest rate to be a bit higher on a rental property compared to one for a primary residence. Lenders assign more risk to a loan the borrower doesn’t live in compared to one where the borrowers live in the property being financed. How much higher will interest rates be? Not a lot but you can expect the rate on a 30 year loan to be around 0.25% to 0.375% higher.

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When financing a primary residence the minimum down payment for a conventional loan can be as low as 3.0% of the sales price of the home but with a rental property, the minimum down payment is higher. How much higher? For a rental property, the minimum down payment is 15 percent of the sales price but if you put 20 percent you’ll get slightly better terms.

my lender allows me to put a minimum of 15% down which carries PMI, but what I've done several times is refinance after 6 months to remove the PMI after my repairs are made and is fully rented. This allows for me to remove the PMI and in most cases luckily improved the interest rate. Also gives me an opportunity to pull cash out if value has increased that well. My goal in this is to preserve as much capital as possible to continue to grow. Id love feedback on my strategy from the forums. Constructive Criticism welcome!

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