There is a general assumption among many real estate investors that the minimum down payment for an investment is around 20% to 40%. If you are a new property investor, this percentage range is quite hefty. You may not have that big bucks to make your down payment. 

Property investors should be skillful in looking for good deals, including how to decrease the sizeable down payment. Here is a list of creative strategies to lower the minimum down payment when buying a rental property. 

Reside in the Property for a Year

Qualifying for an owner-occupied mortgage is possible if you live in the property you just bought for at least one year. 

The FNMA provides traditional loans with as low as a 3% down payment for rental properties – or those properties to be utilized as investment homes later. No down payment options are also available from the VA, USDA, and NACA loan programs for purchasing investment properties if the investor moves in for a year (supposing he satisfies the requirements). 

You can also qualify for as low as a 3.5% down payment if you take an FHA loan. If you have a problem with your credit (say, a 580 credit score), FHA can offer loans designed for high-risk borrowers like you. 

However, the catch with lower than 20% down payments is you have to buy mortgage insurance. Mortgage insurance can increase your monthly mortgage payment and decrease your monthly cash flow. 

One good tip is that you can rent out some of the rooms while you are living in the property. Then, you can consider moving out, and use the property as a rental after a year. 

Borrow Money for the Down Payment

Borrowing money for the down payment through a personal loan, HELOC, or private loan from any of your relatives and friends is a good option. Use your HELOC and borrow the equity as a downpayment to purchase a rental property.

You can also open and draw from an unsecured business credit line or card. There are services that only have 0% initial interest rates and 2.5% in cash advance fees. Job retirement accounts like 401(k) are also a good source from which you can borrow money to make a down payment for an investment property. 

Borrow Through Owner Financing

Owner financing is when the seller of the property lets you, the seller, borrow from him for the down payment. Even if this only covers a part or the entire down payment and not the main mortgage, owner financing can be helpful if you want to invest in a rental property. 

You can also negotiate with the seller about the up-front fees, amortization period, and terms. Typically, owner financing has a three- to five-year term. 

Moreover, you can assume the seller’s existing mortgage on the property or do a wraparound mortgage. This way, you will be paying lower interest and avoid exorbitant fees and closing costs. Make sure to put in your negotiation skills to avail of a lower down payment through owner financing. 

Cross-Collateralization

You can allow your lender to put a lien against your house or another investment property in which you have equity instead of paying a down payment on a rental property you want to buy. The additional collateral can motivate the lender to waive the down payment requirement. 

The lender will secure two properties under a single loan if you default. This arrangement is advantageous to the lender, and it is more likely he will agree to waive the down payment. However, be sure not to default on the loan because you will lose more in this arrangement if you fail to pay the loan. 

Buy, Renovate. Rent, Refinance, Repeat (BRRRR Method)

You can pull the down payment after you purchase and renovate the property. This method is called the BRRRR or buy, renovate, rent, refinance, and repeat. 

The strategy is to ensure you purchase a property where you can build equity after completing the renovation. You can take out a purchase-rehab loan to pay for the renovation costs, and then you find tenants, refinance, and get the initial down payment back using your new loan. Your new loan depends on the after-renovation value and not your initial purchase price. 

See to it that the property generates a stable cash flow each month, even after you go for the refinancing. Predict your return on investment and net income each month using a rental cash flow calculator. 

Endnote

Lenders find property investors as a risky type of borrower, as the latter have higher chances of defaulting on the property, especially since they will not live in it. This circumstance makes lenders increase the down payment on the property. Thus, if you want to invest with less and decrease the minimum down payment, follow the strategies above.