What Is the Minimum Down Payment for Investment Property?

An investment property is real estate acquired not as a primary residence but with the intention of generating income or appreciation. A down payment is the initial sum a buyer provides towards the purchase price, reducing the amount borrowed. It mitigates risk for the lender and establishes the borrower’s equity.

Distinguishing Investment Property Financing

Financing an investment property differs from a primary residence. Lenders view investment properties as higher risk because borrowers prioritize primary home payments during financial difficulty. This leads to stricter qualification criteria and higher down payment requirements for investment loans.

Investment properties typically do not qualify for government-backed programs like FHA, VA, or USDA. These programs are designed for owner-occupants. While FHA or VA loans can be used for multi-unit properties if the owner occupies a unit, this differs from a pure investment property. Conventional loans are the most common financing avenue, reflecting this heightened risk.

Standard Down Payment Minimums

The minimum down payment for an investment property varies based on property type and financing option. These percentages reflect the lender’s assessment of risk and the asset’s nature.

For single-family investment homes financed with a conventional loan, the minimum down payment ranges from 15% to 25%. While some lenders accept 15%, 20% to 25% is common for favorable terms. A larger percentage often results in better interest rates and loan conditions.

For multi-unit residential properties (two to four units), down payment requirements depend on buyer occupancy. If the buyer occupies one unit as a primary residence, conventional loans can allow down payments as low as 5%. However, if the multi-unit property is purely for investment, conventional loans require a 25% down payment.

Non-Qualified Mortgage (Non-QM) or portfolio loans offer alternative financing for investors who may not meet conventional loan guidelines. These loans often have more flexible underwriting criteria but varied down payment requirements. While some Non-QM loans allow down payments as low as 10% to 15%, they may require 20% to 30% down, depending on the lender and program’s risk assessment. These loans are used when a borrower’s financial profile or the property does not fit conventional lending standards.

Commercial investment properties, including buildings with five or more residential units, retail spaces, or office buildings, operate under a distinct lending framework. These properties demand higher down payments than residential investment properties. Typical minimums for commercial property loans range from 10% to 35%, with many traditional bank loans requiring 20% to 30%. Certain government-backed Small Business Administration (SBA) loans can offer lower down payments, as low as 10% to 20%.

Borrower and Property Factors

Beyond the general loan type, borrower-specific and property-specific factors influence the minimum down payment a lender requires for an investment property. These elements help lenders assess the risk associated with the loan. A strong financial profile can offset risks, leading to more favorable down payment options.

Lenders seek higher credit scores for investment property loans, often 700 or higher, with 720 or more for competitive terms. A lower debt-to-income (DTI) ratio, under 43% to 45%, signals capacity to manage debt. Lenders require proof of liquid reserves, typically three to six months of mortgage payments, to cover expenses even if the property is vacant.

Property characteristics also impact the lender’s risk assessment. Factors like condition, location, appraised value, and potential for consistent rental income influence the required down payment. A property in excellent condition within a desirable rental market presents less risk. Lenders may impose “overlays,” stricter requirements than baseline guidelines, increasing down payment or qualification criteria. Borrowers with multiple financed properties may face higher down payment requirements on new investment loans to manage exposure.

Calculating and Sourcing Down Payment Funds

Once the minimum down payment percentage is understood, calculate the amount needed and identify acceptable sources. The down payment is calculated by multiplying the property’s purchase price by the required percentage. For example, a $200,000 investment property with a 20% down payment requires $40,000.

Acceptable down payment sources include personal savings or investment accounts (e.g., mutual funds, stocks). Funds from retirement accounts like 401(k)s or IRAs can also be used, but consider potential tax implications and early withdrawal penalties. Gifts from family members are permissible, but must be documented with a gift letter stating funds are not a loan. Donor relationship, gift amount, and source must be stated and verified.

Funds from a Home Equity Line of Credit (HELOC) or proceeds from another property sale are also acceptable sources. Lenders require documentation for funds, requesting two to three months of bank statements to verify origin and seasoning. This ensures funds are legitimately the borrower’s and not from an undisclosed source.

Other Upfront Costs

The down payment is a major portion of upfront cash for an investment property, but not the only financial consideration. Buyers must also budget for other costs associated with the transaction due at closing. These additional expenses increase the total cash required.

Closing costs, covering fees charged by lenders and third parties, range from 2% to 5% of the purchase price. These costs include loan origination fees for processing the loan, and appraisal fees for property valuation. Other common closing costs are title insurance protecting against title defects, and attorney fees if applicable. Recording fees paid to local government for recording property transfer, and transfer taxes, are also common.

Buyers may need to pay prepaid expenses at closing, such as property taxes and homeowner’s insurance premiums held in escrow. Beyond the down payment and closing costs, lenders require additional liquid reserves. These reserves, often three to six months of mortgage payments, provide a cushion for unexpected vacancies or expenses. This ensures funds to cover the mortgage even if rental income is interrupted.