While you may be familiar with the adage of putting 20 percent down on a personal residence in order to avoid paying the additional PMI (private mortgage insurance), when it comes to the purchase of rental property, how much is typically needed as a down payment?
The answer is – it depends.
That is because, in some cases, you may be able to get by with a down payment of just 3 to 5 percent, while in other instances, the down payment requirement could be as much as 25 percent of the purchase price – even if you have good credit.
Prior to the housing market meltdown back in 2008, many real estate investors were able to successfully purchase property for investment with very little in out-of-pocket costs. However, since the Dodd-Frank Act went into effect in 2010, lenders are no longer allowed to offer property buyers larger mortgages than they are able to handle.
One reason why getting qualified can be more challenging is because the mortgages on rental properties are not covered by PMI. Therefore, in order to ensure that they’ll recoup their “investment”, lenders are not only requiring higher down payments, but are also oftentimes charging higher fees and closing costs as well.
So, if you’ve found a property that you want to purchase and you’ve determined that it will be a good investment, how can you still make the deal work – without emptying out your bank account?
There are a few suggestions. One potential solution is to ask the seller to pick up a portion of the closing costs and / or various items that may need to be repaired. Another is to shop rates on possible loans. Here, if your credit score is strong, you may be able to secure a loan with a lower rate of interest, essentially lowering your overall cost to purchase the property.
If your credit score isn’t 720 or above, you could consider going into the deal with a partner whose credit score is in the upper range. You should also be mindful of the items that may be taken as tax deductions.
In addition, it is important to factor in the amount of time that you may have to spend on a property, as this too has value. By turning over the day-to-day details of managing tenants and the property, you could still essentially come out ahead. For more details on the benefits of working with a property management company so that you can better use your time, Contact Us.