New to Real Estate · Member since 2020 · 19 posts · 8 votes
Hello,
I have been researching loans and financing options and discovered that many lenders will let borrowers put a lot less than 20% down on a property, given that they get PMI. Now, this sounds great for investors not wanting to put down a lot of money upfront and seems to be a great way to get more properties. However, with this strategy, it seems with a higher mortgage rate from putting less down and the cost of PMI might make it very difficult to find a cash-flowing property. Can anyone inform me of the pros and cons of doing this and enlighten me to any additional information? I am new to this and trying to study more about real estate investing. I would greatly appreciate any time, effort, and insight into this topic. Thank you.
Lender · Member since 2021 · 277 posts · 150 votes
5y
You cannot purchase an investment property with less than 20% down, so you do not have to worry about PMI. Prior to February, you could purchase a SFR with 15% down.
One way to get around this is to purchase a new primary home each year with 5% down (and PMI) and then rent out your old residence. It requires moving every year, but can be a great way to pick up $5MM in assets over 10 years with only ~$250k out of pocket for down-payments.
Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
5y
As an owner-occupant, lenders may go as low as 3% down. For investors using conventional loans on properties they do not intend to live in, the lowest allowable down payment is 15% per Fannie Mae.
For FHA loans, you can put down 3.5% but you would need to occupy the residence.
New to Real Estate · Member since 2020 · 19 posts · 8 votes
5y
@Bob Okenwa
Hey Bob,
I am aware that there are loans out there that allow very low down payments, but even the FHA requires PMI. However, my question is more geared towards using PMI to lower down payment costs of the more conventional loan options that have higher down payment requirements. I am still learning but a lot require you to live in them or you may be limited to how many of those loans you can use. So my question is more on the principal of it. Thanks.
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
5y
With FHA, you must refi to drop PMI, not necessarily the case with conventional. In general, if you CAN use a conventional loan, it's going to be a better long term option than FHA. You're more likely to have a conventioal offer accepted in a compettive market too.
New to Real Estate · Member since 2020 · 19 posts · 8 votes
5y
@Corby Goade
Hey Corby,
Let's say for individual investors using there own capital to get rental properties. In that case, to reduce the amount of needed capital upfront and to be able to have more capital to get more properties, is it wise to use PMI to lower down payment amount so you have more money left over for another property? I feel like the majority of investing funds are decimated with large down payments. Would this be a reasonable and sound financing strategy to use or are there more drawbacks or even benefits to doing this? Thanks.
Lender · Member since 2021 · 277 posts · 150 votes
5y
You cannot purchase an investment property with less than 20% down, so you do not have to worry about PMI. Prior to February, you could purchase a SFR with 15% down.
One way to get around this is to purchase a new primary home each year with 5% down (and PMI) and then rent out your old residence. It requires moving every year, but can be a great way to pick up $5MM in assets over 10 years with only ~$250k out of pocket for down-payments.
New to Real Estate · Member since 2020 · 19 posts · 8 votes
5y
@Gaetano Ciambriello
Thank you for the response. Are you sure you cannot get an investment property with less than 20% down? I know like you mentioned you can get lower down payment loans, although they require you to reside there for a year. However, couldn't a lender let you put down less than 20% if you get PMI? And if so, is this a good way to go about getting investment properties without having to live in a property for an extended period of time?
Rental Property Investor · Atlanta, GA · Member since 2018 · 41 posts · 29 votes
5y
@Elijah Wichers
Sounds like a recipe for bankruptcy. If you don't have the $ to avoid PMI, it is too risky to acquire multiple properties. It costs $ to maintain properties after you buy them. All your cash flow will be eaten up by PMI and you won't have adequate capital for unexpected expenses. Don't make the rookie mistake of overleveraging.
New to Real Estate · Member since 2020 · 19 posts · 8 votes
5y
@Audrey X.
Thank you Audrey for your input. Good point. I knew it would take away from cashflow but if I was able to pay less for a down payment, I figured I would have more cash on hand to possibly be able to get another property shortly after. Mostly was thinking of using PMI to shorten the time it would take to save up enough money for another property. You make a good point though. Thank you.
Real Estate Investor · Longview, TX · Member since 2009 · 111 posts · 28 votes
5y
@Gaetano Ciambriello
Are you sure about that? Is there some source material on this? My lender recently quoted me 15% down and I saw rhat was the minimum DP on the Fannie Mae website (I believe).
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
5y
@Elijah Wichers yes-I think that using an FHA loan to get a head start and house hack is a good way to start if you have very little capital. That's how I bought my first house and I still have it, it's been a great rental me. That being said, in a sitaution like that, it's vital that you invest in a growing area with reliable appreciation- you'll need that equity to leverage if you want to grow.
New to Real Estate · Member since 2020 · 19 posts · 8 votes
5y
@Corby Goade
Hello again Corby,
Yes, I agree that the FHA loan is a great way to start. But couldn't getting a regular loan with PMI to greatly reduce the down payment be just as beneficial and good as an FHA? They both have very low down payments and require PMI because of this. Let me provide a hypothetical. Let's say you get a loan that typically requires a down payment of 20%, but you lender will allow you to put 5% down given that you get PMI. Is this just as effective as getting an FHA loan? Is this a smart way to go about real-estate investing to lower capital requirements? I hope I am clearly getting my question across. I really appreciate your input. Thank you.
You cannot purchase an investment property with less than 20% down, so you do not have to worry about PMI. Prior to February, you could purchase a SFR with 15% down.
One way to get around this is to purchase a new primary home each year with 5% down (and PMI) and then rent out your old residence. It requires moving every year, but can be a great way to pick up $5MM in assets over 10 years with only ~$250k out of pocket for down-payments.
Are these federal regulations that no bank can let a buyer put less then 20% down? What about LTV?
New to Real Estate · Member since 2020 · 19 posts · 8 votes
5y
@Nick Dunin
I agree with you. From my research there are a few options that offer low down payments but I also read that some lenders that usually require a 20% down payment will significantly lower it if you get PMI. Do you have any additional information on this? Thank you.
Rental Property Investor · Inlet Beach, FL · Member since 2018 · 199 posts · 111 votes
5y
Investment properties will require 15% down or more.
If you put less than 20% down, you will have mortgage insurance, and it will not drop off until you refinance.
If it's your primary residence, you can put much less down, and the mortgage insurance will drop automatically at 78% loan-to-value (based on original terms and valuation). At 80% LTV, you can send a letter to your mortgage servicer and ask they drop the mortgage insurance.
Mortgage insurance isn't for the owner of the property. It's for the bank/mortgage holder to protect them in case of default or foreclosure.
Fannie and Freddie aren't "partners" in your investments. They won't finance risks. That's why mortgage insurance is required. That's why down payments on investment properties are higher than a primary residence.
Are you sure about that? Is there some source material on this? My lender recently quoted me 15% down and I saw rhat was the minimum DP on the Fannie Mae website (I believe).
15% down is fannie’s minimum down payment for an Owner Occupied duplex.
Non owner occupied are minimum 20-25% down everywhere.
You've got it wrong...lenders that require 20-25% down for certain type of loans do Not lower that requirement because you are willing to pay PMI, it's Not an option. It Is an option on owner occupied loans where they Give you a choice of 3,5,10,15 or 20% down.
Atlanta, GA · Member since 2016 · 17 posts · 9 votes
5y
@Elijah Wichers This is such a great question and thank you for asking the BiggerPockets community! It all depends on your goals. As an investor, you always want to make your money stretch as far as it can, and multiply as much as possible. The PMI can average between 0.5 and 1.5 percent of the loan amount on an annual basis, so it can hurt your wallet. But, you should still be able to find cash-flowing markets, that will keep you making money while paying down your equity to the 20% threshold, to where you no longer would need PMI. In my personal opinion, putting less than 20% down payment will make your investment more worthwhile. Real estate is all about leveraging your money, don't let a PMI payment keep you from doing that. Best of luck in all of your endeavours!
Are you sure about that? Is there some source material on this? My lender recently quoted me 15% down and I saw rhat was the minimum DP on the Fannie Mae website (I believe).
The rules are always changing. When I first got into rental properties back in 2004, you could get PMI on investment properties. They did away with that after the housing crash. You cannot use PMI for investment properties unless you owner occupy it first. As far as down payment, currently Fannie Mae allows 15% down payment on a single family home investment property. Over time I have also seen the number of financed properties, reserve amount requirements and percentage down payments fluctuate. It is best to check current eligibility matrix or ask your mortgage broker. You may also pay a higher interest rate with lower down payment.
Just to confirm one more time for the original poster, you cannot use PMI on investment properties at this time using conventional financing.
That being said, if you owner occupy and use PMI, it is an excellent way to maximize your cash on cash return. No cash out of your pocket is the ideal situation.
Rental Property Investor · Dallas, TX · Member since 2020 · 50 posts · 41 votes
5y
@Elijah Wichers, see if you can cancel PMI as soon as you achieve 20 percent equity. I would do it only if there was no other way and the property was a real gem.