Real Estate Investing: How Big of a Down Payment Do I Really Need?
TL;DR - While the average down payment is 5% for first-time home buyers and 10% for second-time home buyers, you can put as little as 0% or as much as 25%+ down. It’s best to save up and invest in the largest down payment you can manage. That way you can increase your return and cash flow!
So, you’ve found the perfect real estate market for the type of property you want to buy.
Maybe you’ve even been looking for deals when you get a minute or two.
But, now you’re wondering…
How much do you need to save up for a down payment?
While there’s no technically correct answer, there is one that’ll help you generate positive cash flow right away.
So if you’re trying to get ahead of the close, then let’s talk about it.
How Big Should Your Down Payment Be
Down Payment Percentage Breakdown
There are a plethora of ways you can handle your property’s down payment.
You can shoot for no down payment at all, go for somewhere in the middle, or utilize pro advice and put down 20% or more.
But what’s the most common down payment amount? And who qualifies for each percentage? Here’s a brief overview.
0%
A no down payment loan will be coming from either the VA or USDA.
To get a VA loan, you must be retired from the military or currently serving.
A USDA loan is only granted when buying in a rural part of the country. Even then, there are extra requirements in income that you’d have to meet.
Basically, 0% down payments are rare and only apply to a select few people.
On top of that, these types of loans can hurt your more than they help you. That’s because down payment amount correlates directly with your monthly mortgage payment.
The bigger your down payment, the less your monthly mortgage payment will be. The lower your down payment, the more your monthly mortgage payment will be.
3%
As a first-time homebuyer, you can get a conventional loan that only requires 3% down.
You can also get this loan as a current or past homeowner, but you’d have to be under the HomeReady/Home Possible income limit.
3.5%
To get an FHA loan, the minimum down payment amount is 3.5%.
You don’t have to be a first-time homebuyer to qualify for these loans.
5%
This is the average down payment amount for most first-time home buyers.
10%
On average, second-time homebuyers put down 10% on their new property.
15%
When you’re buying a property strictly for investment purposes, the minimum down payment is 15%.
This would mean that you aren’t living in the property at all and are simply trying to make money off it. Renting it out to a tenant, rehabbing it, etc.
20%
The golden standard for real estate investing. You might be asking, “why?”
Once you’ve paid off 20% of your mortgage, you don’t need to pay for mortgage insurance anymore. This heavily reduces how much you owe each month, allowing you to maximize your monthly cash flow from a rental property.
While you can find down payments higher than those listed above, these are the most common amounts and percentages.
An Example of Returns Based on Down Payment Amount
Here’s a spreadsheet we made to help you understand why saving up for the best down payment benefits you.
In our example, we chose a $150,000 property to illustrate how big of an effect down payment has on your return.
There are 4 different down payment amounts – 0%, 5%, 20%, and 25%.
We kept the interest rate flat across the board; 5%. The monthly expenses stay at $750. Our collected rent was $1,500.
Loan amount of course decreases as the down payment gets bigger.
But notice how big of a difference a larger down payment makes!
When you pay 0% down on a property, you’re robbing your future cash flow. The monthly mortgage payment gets super inflated to compensate for the lack of money down. It also takes much longer to pay back a 0% down loan… we’re talking additional years.
Then we get to 5% down. It’s slightly better in the monthly mortgage payment category. You’re saving $40 a month compared to 0% down. But you still aren’t making a good return on your down payment – it’s actually a poor -2%. So while 5% down is a step in the right direction, this is not a cash flow positive property yet.
When you begin to put 20% down on a property, things are starting to look good. Your monthly mortgage payment is a nice $121 cheaper compared to 5% down. And you’re finally generating positive cash flow! $106 a month to be precise. You’re getting a 4% return on your down payment. Pretty sweet, huh?
You’ve decided to throw 25% down on your new property and boy will you be rewarded. Not only is your monthly mortgage a whopping $201 cheaper than 0% down (!!!), but you’re also seeing a 5% return on your down payment. That’s a whole $146 in monthly cash flow from your property. You’re starting to enter the major leagues now!
As you can see from this example, putting a larger down payment on a property will increase your returns massively. The difference between a 0% down payment and a 25% down payment is night and day.
The key takeaway is this:
A bigger down payment means a lower monthly mortgage payment. A smaller down payment means a higher monthly mortgage payment.
Keep in mind that this is an overly simplified example to illustrate this point. In reality, a 25% down payment would get you a better rate than 20% down.
Also note that the difference between 50% down and all-cash purchase is not that significant: 5.6% vs 6%. Maybe you want to get a very slightly lower return but acquire two properties instead of just the one to diversify your portfolio.
If you can understand that, then you’ll see it’s in your best interest to save up as much as possible before buying a property. After all, cash flow is king!
Conclusion
What down payment amount’s best for you? That’s up to you and your situation.
If you really want a property right away, you can get one for 0% down. But the monthly mortgage payment is probably not worth it.
It’s best to save up as much as you can before investing in a rental property. That way, you can invest in a good down payment and maximize your cash flow return.
Happy investing!
How We Can Help You
Does investing in real estate sound intriguing to you? Would you like to learn more? We’d love to be of value!
At Undoor, we pride ourselves on teaching new and experienced investors how to maximize their gains with minimal stress. Our goal is to help you fall in love with real estate and real estate investing. What we’re most passionate about is maximizing investment gains for people like you.
Do you want to get key insights and advice that’ll help you get ahead of the game? Don’t hesitate to contact us for any and all real estate wants or needs.
