Investing in a real estate property is a huge financial step to take. You as a future real estate investor have to make sure you are ready, and that you have an ample amount of money set aside for your new venture. Although the rule of thumb has always been to put a down payment of anywhere from 15% to 20%, it is understandable and realistic to stay that many future real estate investors may not have such an amount of money. However, in order to ensure that you steer clear of any financial problems that may arise from not putting a sufficient down payment, you may want to think twice.
Before jumping into the ample world of real estate investing, it is worth taking a look at the reasons why you should actually never put less than 20% down payment if your conditions force you to go for a mortgage when buying rental property. Here are the main benefits which you get from such a commitment:
Lower Monthly Payments
When you invest in real estate property, you are always taking a risk. You take the risk of losing money on the property you are investing in, and you take the risk of not being able to pay off the payments on the loan for your property. However, in order to increase your chances of being a successful investment property owner, you must do your homework. Putting less than a 20% down payment would mean a very high monthly mortgage payment. With all the costs that come up with investing in real estate properties, from repairs to renovations, you may find yourself in a bind to make such a high payment each month. Let’s say you purchase a $300,000 rental property. A 20 % down payment would mean putting down a $60,000 down payment. Depending on your mortgage, this would put your monthly payment at around $1,689 for a 15 year mortgage, and at around $1,149 for a 30 year mortgage.
Now, let’s say you put a 10% down payment on that $300,000 real estate property. 10% would amount to a $30,000 down payment. This would put your monthly payment at around $1,900. You have to admit that there is a major difference between $1,149/$1,689 and $1,900 going out every month. Of course, you must consider your income before you even start looking for specific investment properties to see what properties you are able to afford without putting yourself under unbearable financial stress.
Putting down a higher down payment means less interest. For example, if you put a 20% down payment on a $350,000 home, you are looking at paying $93,786 in interest over the term of your mortgage. However, if you are putting 10% down, you will be paying $108,042 in the form of interest. Putting that 20% will save you over $21,000 in interest costs. That is a huge difference!
Moreover, the 20% down payment means lenders are more willing to work with you. A higher down payment shows lenders you have the means to pay for the home, and that you also are willing to take the responsibility that comes with owning a real estate property. Having good credit is probably the number one factor that is taken into consideration when purchasing a real estate property through a mortgage. However, if you are able to make a higher down payment, lenders may approve you even if you have an average credit score.
Flexibility to Finish Mortgage Payments Faster
Depending on the type of loan you decide to take, whether it is a 15 year or 30 year mortgage, putting down a higher down payment means you are more likely to be able to finish up your mortgage payments more quickly and efficiently. Without the added interest, paying off your real estate property in a significant amount of time is actually doable. You won’t be making payments on your rental property for the rest of your life.
You finally find that investment property that you’ve always been dreaming of. It’s in the perfect location, and it has the perfect price. Chances are you aren’t the only one putting the offer on this dream property. You may find yourself competing with several people for the best offer. In this case, the 20% down payment will work in you favor. Sellers will look at how prepared the buyer is to purchase the property. Having a higher down payment than your competitors will put you at a great advantage. This will also give you the confidence to put in several offers on various rental properties you may be interested in.
Planning and saving a 20% down payment may potentially give you financial freedom. With all the costs associated with investing in a real estate property, including maintenance and renovations, among others, putting most of your savings towards the property so you can finish up the payments faster, and with lower monthly payments, will allow you to finish paying off your property quickly and efficiently. In turn, this will allow you to have financial freedom. Financial freedom means regaining control of your finances, allowing you to not worry about any debts or payments you may have.
Saving the down payment will also you give you the reality check you need. Purchasing a real estate property is no walk in the park. If the down payment you can afford is not high enough, maybe you should reconsider your investment altogether. Take some more time in order to save the money for a 20%+ down payment. Indeed, the higher the down payment, the better your investing in the long run. In the end, it is truly worth the waiting to make sure you have enough financial resources before you become a real estate investor.
Once you know you are ready to start the search for your first or next income property, make sure to check out Mashvisor for many actual properties across the US. For short term rental properties, use Mashvisor’s Airbnb calculator to determine how much the property will provide you in terms of rental income.