Down Payment Basics
Before you can purchase an investment property you must know where you are going to get the down payment from. A down payment on investment properties can either be in the form of cash or equity from another home.
If you are going to use cash, you will most likely be required to have a down payment of 20%, because it will not be owner-occupied. If you do not have the required 20% down payment then you can use the equity in your current home or investment properties. For example, if you own a house that is appraised at $100,000 and you still owe $90,000 you can use the $10,000 equity the home has as collateral for part of the down payment in the property you are purchasing.
Another way of purchasing an investment property if you do not have the cash to use for the down payment is to arrange a land contract with the current owner of the property. With the land contract filed and in place you can then make upgrades and remodel the house. Doing this will help increase the value of the property and therefore lowering the cash down payment required for financing the investment property with the bank or financial institution. Just remember the lender want 20% equity in the house for the owner. This means if you agreed to buy the house for $85,000 and the house is now appraised for $100,000 after you did the upgrades and remodeling then you now have $15,000 equity in the investment property that can be used toward financing that house through a lender and eliminating the land contract.
Remember, the lender wants you to have a stake in the property of at least 20% so the financial institution can cover themselves in case of a default of the loan. They figure if you have 20% of the equity in that property you are more likely to pay the mortgage payments and will not let the property go into foreclosure.