Mortgage Mythology: The 25% Investment-Property Downpayment
There is a myth that your investment-property downpayment must be 25%. But as we’ll show in this article, there are options for 15% down. We’ll also show how this seemingly-small difference can have a massive impact on your total downpayment.
Investment properties have a wide range of benefits.
Not only are you purchasing an asset that can bring steady, consistent monthly checks to your budget, you are adding an asset that will (in almost all cases) steadily grow in value as you own it. Thanks to regular income and steady growth, investing in property is one of the best ways to build a strong financial portfolio.
But investment property can be expensive. In most cases, you need hundreds of thousands in upfront dollars to purchase a property. In some cases, the total price can approach a million! For this reason, most people need to use a loan to buy an investment property.
Unfortunately, there is a myth related investment-property downpayments that may keep people from taking advantage of this opportunity. The myth makes people believe they need far more upfront cash to purchase an investment. But, as we’ll show, this is not the case.
If you are purchasing a single-unit investment property, you can likely make the purchase with a smaller investment that you originally thought possible!
Mortgage Mythology and the Truth: You Can Purchase an Investment with only 15% Down
Myth: You must bring 25% for an investment-property downpayment.
There is a myth floating around that if you are going to purchase an investment property, you will have to put down 20%. Some even believe you need 25% for the purchase.
Truth: You can purchase a single-unit property with only 15% down.
The truth is actually quite simple: it’s possible to purchase an investment property with only 15% down. When purchasing the right type of property, you won’t need to fund a quarter of the purchase with your own cash. As long as you are buying a single-unit property, you can make the purchase with only 15%.
Where Did this Myth Come From?
Misconceptions about mortgages and real estate can come from many different sources. In some cases, it’s simply a matter of mistaking a few details or applying these details in the wrong place.
It appears that this myth is rooted in reality (like many myths), but it’s been shifted to create a misconception. There are investment-property loans that require 25% down, which is likely how this myth started in the first place.
If you are purchasing a multi-unit property, you will likely need about 25% down on the purchase. The minimum downpayment for a 2 to 4-unit investment property is, in fact, 25%. It appears this is where the myth started. Assuming that this requirement applies to all investment properties, people have taken the 25% rule and mistakenly applied it to other loan options, especially investment loans.
This is likely where the myth came from. People learned that you need 25% to purchase an investment property that has 2, 3, or 4 units; somewhere along the way, like a game of telephone, the reality was bended and changed. Eventually this 25% rule seeped it’s way into single-unit investment property, causing buyers to assume that the requirements for purchasing a single-unit properties was steeper than the reality.
Why is Understanding the Truth Important?
You need a downpayment regardless of the unit count, so why is this myth so damaging? There are many myths in real estate and mortgages, but this one, like many others, has the potential to artificially limit people’s buying opportunities and cause them to avoid purchasing investments.
First, let’s look at some of the numbers…
The myth holds that you need 25% for a single-unit investment property, while the reality is that you only need 15%. How does that translate into dollars? Let’s assume you are purchasing a property worth $500,000, a perfectly-reasonable price in markets like San Diego, many other areas of California, and numerous regions of the country.
At $500,000, a 25% downpayment would represent $125,000. A 15% downpayment, however, would only be $75,000. Yes, $75,000 is still a large sum of cash, but it’s still $50,000 less!
What if the property was worth $750,000? If you needed 25% like the myth says, you’d need a downpayment of $187,500. But, fortunately, you’ll likely need only a 15% downpayment, which means you need $112,500. Now we are seeing a significant difference, as the two downpayment totals are $75,000 apart!
How Can this Myth Be Harmful?
All misconceptions and myths have the potential to be harmful. But this one in particular could be damaging because it potentially limits investment opportunities. When potential investors start thinking about buying a property, they often start by looking at the upfront costs. If they are operating under the assumption that a 25% downpayment is required, they may do the math and see that a large downpayment will be needed.
Under false pretenses, they may assume that it’s too expensive to purchase an investment property. Instead, they will stick to traditional investments like stocks and mutual funds. Of course, there is nothing wrong with these investments, but owning property as an investment can bring a steady income and an appreciating asset to your portfolio. If you assume that you’ll need 25% for all investment properties, you may skip this option entirely.
What Options are Available for Multi-Unit Properties?
While you only need 15% down for a single-unit property, you will likely need 25% down on multi-unit investment properties. However, there are options that allow you to reduce this requirement.
In particular, if you are willing to live on the property for a certain period, you can take advantage of government-backed lending such as FHA loans. With this financing option, you can buy a property with up to four units, but you’ll have to live in the property for a given period.
While it may not be the most convenient, it does offer a low-downpayment option if you are set on purchasing a multi-unit property.
An Affordable Loan for Your Next Investment Property
If you are ready for a high-quality loan on your next investment property, give us a call. We would be happy to help you find an affordable loan with a fair interest rate and a low downpayment.
Contact our staff today and see if you can help your financial wellbeing with affordable investment-property loans.