Purchasing an investment property with a low down payment of 15% or less can seem appealing to real estate investors, as it requires less upfront capital. However, low down payment investment property loans also come with risks. On the one hand, putting less money down means greater leverage and the ability to get higher returns. But on the other hand, it increases exposure if property values decline. Investors need to weigh the benefits and risks carefully when considering 15 down investment property loans. This article will provide an in-depth look at the pros and cons of low down payment investment property financing.
Leverage increases potential returns with 15 down investment property loans
The main benefit of a low, 15% down payment on an investment property is the ability to leverage the investment for greater potential returns. With less equity invested upfront, any appreciation on the total property value accrues faster. For example, if you put 15% down on a $300,000 property that appreciates to $330,000, your return on equity would be 33%. Had you put 30% down, the return would only be 17%. Of course, leverage works both ways, and losses are amplified as well. But in a rising real estate market, leverage enhances returns for investment property owners.
Lower capital needed allows investing at higher volume with 15 down investment property loans
Putting only 15% down also allows investors to purchase more properties and build a larger real estate portfolio with the same amount of capital. Rather than tying up cash in a few properties, they can distribute it across more investments. This diversifies risk and takes advantage of more potential opportunities. Building scale is key to succeeding in investment real estate over the long run. 15 down financing helps facilitate that for investors lacking large capital reserves.
Risks include higher mortgage costs and amplified losses with 15 down investment property loans
While leverage can boost returns, it also cuts both ways when property values decline. With just 15% equity, investors have much more exposure compared to those who put 30% or more down. A 10% drop in value on a 15% down investment property results in a 67% loss on the equity invested. The same 10% decline with 30% down equates to just a 33% equity loss. The risks of leverage must be weighed carefully before opting for a low down payment.
Tighter lending standards present challenges for 15 down investment property loans
Another downside of low 15% down financing is that lenders will require higher credit scores, income levels, and lower debt-to-income ratios compared to larger down payments. Meeting these stricter standards can be difficult for some real estate investors. And violation of any terms after closing could trigger a loan call provision by the lender. Investors need to be sure they can comply with tighter requirements when getting 15 down investment property loans.
Mortgage insurance costs should be factored in with 15 down investment property loans
Since low down payment loans involve greater risk, lenders typically require mortgage insurance, adding to the financing costs. Mortgage insurance premiums on a 15% down investment property loan could range from 0.5% – 1.5% of the total loan amount per year. This increases the effective interest rate paid. Investors need to factor this added cost when analyzing the viability of 15 down investment property loans.
In summary, 15 down investment property loans allow real estate investors to leverage their capital for potentially higher returns while minimizing upfront equity needed. However, risks are also amplified, lending standards are stricter, and mortgage insurance costs must be considered. Weighing these pros and cons will help investors make informed decisions about using low down payment financing.