How can I buy first rental property with less then 15% down?

32 Replies

I live in MN and im trying to purchase my first SFR as a rental property. However I look at it I need to pay 15% down or live in it for a year first. Is there a way to secure a loan that would require 10% or less as a down payment? Thanks for the help!

Talk to different banks. Whats the purchase price? Can you add value to the property quickly? If so buy with a Hard Money Lend or someone else's money, rehab with that money as well then walk into a bank and refi. The rehab will get the appraisal up, hopefully (due your research) beyond your purchase and rehab and you could potentially get in it for zero money down. 

@Natan Gutt the down payment potential is not a universal one, the individual property, condition, use will have a major impact. 

As a general rule the best way to leverage into a property deal is via FHA which will allow as little a 3 1/2% down. BUT but but, that is not always a good thing, being so heavily leveraged. Let's say you got less than a good purchase price, say less than 1%, maybe close to 1/2% mark as I am hearing too often now. First time you have vacancy, or water heater goes out, furnace breaks, it could financially cut deep.

Hard Money Loans (HML) are about the single worst thing you could do to buy a rental property, only thing worse is paying 2X market rate, that's about it. If you need a HML to acquire a rental, then DONT acquire that rental. You would have better odd's going to a casino and putting everything you have on black at the roulette table than you do of having a good outcome of a rental property bought via HML.

HML are for short term real estate deals, NOT long term. The alternative of finding a private $$$$ partner will always be much better, for many reasons.

The #1 best deal is the one you make a great return at, the #2 best deal is the one you never did! Rule #1 is to make $, rule #2 is DONT LOOSE MONEY, and rule #3 is NEVER FORGET RULE #2!. 

It is very easy to loose 2,3, 4+ deals worth of profit on one loose. 

Originally posted by @Natan Gutt :

@James Hamling

Thank you for taking the time to answer! I will look deeper into finding a private loan from someone. And not take an HML!

 No, not a private loan, a Private Funding PARTNER. 

You said your new at this, looking to make 1st deal, correct? Let me ask you, if the shoes were flipped, you are sitting on a giant pile of $$$$ and someone comes along and asks you to give them tens and hundreds of thousands to do an investment deal, which they have never done before, with zero experience or track record of success, would you give them a loan? 

With that it is not reasonable to expect anyone to make a loan, not a fair one. A capital partner is a different thing, they are a part of it and have some levels of control that a loan alone does not grant. Most often this is a person, usually an existing personal relationship, who has a interest in REI, the money, but no time available to do the active day-2-day operations of such. The pairing is a win-win.

It is not a realistic or reasonable thought for a "noobie" to jump into REI and make sizable returns day, week, month, year 1. Going it alone it is most probable to experience loss than profit. It is by far best to start into REI with some form of JV's with experienced professionals, taking lower profits yes but also far less risk and gaining priceless knowledge and experience along the way.

In truth and fact it is a process that takes time measured in years to become proficient at operating alone. Yes many have jumped in and done well without such, myself included in that list, but also most if not all of those instances there was some kind of experienced advantage that facilitated that success, again myself included, I was a building professional for over a decade. 

When you follow these steps, the financing means and network come and become very easy. If financing is a struggle it is a sign that your not ready. 

@Natan Gutt

Hey man. I bought my first property in Elk River Mn (about 35 minutes from Minneapolis) a month and a half ago. My property is a 3/3 townhome with some value add opportunities. The purchase price was $225,000 on a 5% down conventional loan. I'd definitely recommend shopping around a bit more or working with a mortgage planner to figure out what you qualify for. I can give you the contact info for you he mortgage planner who originated my loan and helped me along the way. Send me a PM!

@Natan Gutt

It will be tough. Your issue is whether you are owner-occupied or not. The former allows you to take advantage of all the conforming loans such as 3.5% fha, 5% conventional, etc. however, once it’s an investment property, you generally need closer to 20% down and really only a conventional loan product will work.

Otherwise, you will have to go after more “advanced methods” such as private money, seller financing, etc.

Hard money loans are designed to be short term (less than 1 yr) after which you need to refi into some sort of conventional loan. I suppose if you used hard money to purchase and did a brrrr type strategy, the increased value of the property would generate the down payment for you — risky especially if you don't know what you are doing.

Good luck.

Originally posted by @David Lee Hall, III :

@Natan Gutt

HMLs will do 10% sometimes.

You can do creative financing with conventional loans sometimes. You could have the seller carry a note for that extra 5%.

Hi David,

I have heard about creative financing, but never been able to understand it completely. So would you be paying that 5% to owner under a contract (3rd party) while you apply the 10% in say a conventional loan? SO you would technically have two loans one with bank and owner for example?


@Ethan Perry Nice! I think looking at your scenario being a newbie as an investor.... I know many people want to avoid PMI.... so I am assuming you were ok with paying PMI and that the rent from your tenant will cover the cost of your PITI + PMI? Putting 5% down is perfect if the numbers all work out.

Originally posted by @Leonel Lerena :

I have heard about creative financing, but never been able to understand it completely. So would you be paying that 5% to owner under a contract (3rd party) while you apply the 10% in say a conventional loan? SO you would technically have two loans one with bank and owner for example?


Let's use a quick example to explain. 

You have agreed to Buy a house for $100k that is rented at $2000 a month. You are pre-approved for a mortgage through a bank for $85k. Unfortunately, you only have $10k in cash. The deal is done right? You can't get your hands on this sweet 2% rule property because you just don't have the money. Wrong, you have everything you need in front of you - someone to unload a property with no hassle that is cash flowing already. You could approach the seller for a loan of $5k @ 10% interest over 12 months with a balloon payment secured by a second mortgage. Now you have the needed funds to close and the seller gets what they want plus some interest for their assistance. Additionally, if this home was owned free and clear, there never needs to be money exchanged, they just get a secured promissory note at closing.


@Natan Gutt you are asking about the financing but not mentioning what kind of return you are expecting on this property. Realistic return, btw. 

If you can't clearly and conservatively see how this will generate positive yield, based on the price you will be paying, don't even worry about the financing. 

Needs to be a good deal, or don't do it. 

@David A.

Ok. Since I’ve posted this question and learning more about financing I’d like to ask this a different way now.

I have a family friend that has a couple of rental properties. Partnering up with someone like him to help with, let's say, half the 20% down payment, but I take care of managing it, what would be the rough rule of thumb for splitting the property? 80/20? 70/30? I know to know fractional ownership needs to go through a business if it's not 50/50 correct? I have an LLC anyways.

For more context I am looking for roughly a 200k sfr with 3 bed and 1 bath. Going rent rents are roughly $650 a room, but all under one lease for $1,950

Thank you all for your input.

@Natan Gutt In most deals, it’s a 50/50 split between the work involved and the money invested. However, since you’re putting in the effort to find, vet, and manage tenants while also fronting 50% of the down payment, I think it’s fair to ask for 75/25 or 70/30 if you like round numbers.

If you plan on making a partnership out of this, make sure to set expectations and align your goals and ambitions before you do anything else. It's also worth noting that before making any partnership official and sealed by print/law, you should do a couple deals first and see how you work together and play off each other's strengths and weaknesses. You may find that the two of you simply don't work well together. It happens, not the end of the world. But at least you don't have to deal with the pains of dissolving an LLC that you started together.