Down Payment Requirements for Non-Primary 1-4 unit loans

6 Replies

I'm just starting out as a REI, and looking for some advice and insight as to the best approach for down payment requirements within various scenarios.

I've talked with a handful of local banks and mortgage brokers so far, and they've all indicated the same general numbers. Since I already own my primary home, and not looking to "house-hack," I am required to put down the following:

  • SFH = 20% minimum (or 15% + PMI)
  • 2-4 units = 25% minimum

If I work through the commercial group within a local bank, they're willing to do 20% down on any 1-4 unit, plus potentially provide a small rehab budget. Unfortunately, they don't offer anything more than 20-year loans, as opposed to the 30-year in conventional residential, which makes my cash flow calculations a little tougher to hit. 

So my question is, are there any lenders who would fall outside of these standards on the residential mortgage side and have lesser requirements for an investment property down payment? Or is this going to be the exact same with every lender, regardless of size, location, etc? 

Thanks!

@Andrew F. as the saying goes you can’t have your cake and eat it too. You can get a lower downpayment but it’ll be a higher rate or shorter amortization.

If you like 30 year fixed, 30 year amortization you can stick with the 25-30 percent downpayment. Easiest way around that is to live in it for a year.

Most common commercial mortgage I’ve seen is 5 year fixed and 25 year amortization.

Generally speaking, I think those down payment requirements for 1-4 units will be the same through any traditional/formal lender.  Just from seeing other posts like this and the information that's out there, I think most people will tell you the only way to get a lower down payment than that is to use a private lender or seller financing.  Probably wasn't what you wanted to hear, but that's been my experience. 

Andrew, look to acquire properties under value (with cash if possible), do some rehab, then cash-out refi, and you are generally left with a lot less than 25-30% into the property. 

Example:

Acquire property A for $40K

Rehab property A for $20K

All In equals $60K

After repair value (ARV) is $80-100K

At $80K Market Value/ARV you can do a $60K loan (75% of $80K) and have no money left tied into the property, then repeat for Property B.

At $100K market Value you can cash out immediate profits and have none of your original money tied up into the property. 

If in the same scenario your appraisal comes in low at say $70K, your 75% LTV loan would be for $52,500; which means you only have $7500 tied up in the property, or only a little over 10% (cashing out $52,500 of your initial cash investment of $60K), plus maybe $2-3K in closing costs.

Hope this concept helps. I have done it repeatedly. Network with wholesalers, build a network of reliable contractors (probably the hardest part), and be patient for the right deals. There are no perfect deals but many right deals that will work with this type of scenario. 

Feel free to contact me directly for any other help I can give. 

Andrew.   

Originally posted by @Andrew C. :

Andrew, look to acquire properties under value (with cash if possible), do some rehab, then cash-out refi, and you are generally left with a lot less than 25-30% into the property. 

Example:

Acquire property A for $40K

Rehab property A for $20K

All In equals $60K

After repair value (ARV) is $80-100K

At $80K Market Value/ARV you can do a $60K loan (75% of $80K) and have no money left tied into the property, then repeat for Property B.

At $100K market Value you can cash out immediate profits and have none of your original money tied up into the property. 

If in the same scenario your appraisal comes in low at say $70K, your 75% LTV loan would be for $52,500; which means you only have $7500 tied up in the property, or only a little over 10% (cashing out $52,500 of your initial cash investment of $60K), plus maybe $2-3K in closing costs.

Hope this concept helps. I have done it repeatedly. Network with wholesalers, build a network of reliable contractors (probably the hardest part), and be patient for the right deals. There are no perfect deals but many right deals that will work with this type of scenario. 

Feel free to contact me directly for any other help I can give. 

Andrew.   

Thanks Andrew. Sounds like a great strategy, how do you go about funding the purchase and rehab? Do you use hard money, or all cash for the purchase and rehab, then refinance through a traditional lender?

Personally to date I have self-funded. I like the freedom to analyze the deals myself then do cash out refi when the rehab is done. I prefer the BRRRR method to flips as I look to build a larger portfolio. Nothing against flipping but I enjoy seeing the appreciation, principle reduction and long-term cashflow.

Yes either conventional lender, or commercial SFR lender (6-8% but qualifies on the DSCR Debt Service Cover Ratio (fancy way of saying profitability) of the property itself). Typical for those types of lenders is the rent should be 120-130% of the PITI payment (stated as 1.2-1.3 DSCR). So if your PITI payment is $1000/mo, the market rent rate should be atleast $1200 to $1300+/mo.

Hope this helps.