Utilizing 5% down payment options is how investing in real estate was, and continues to be, accessible to me! I purchased my single family home in 2020, lived there for 2 years and slowly renovated it. Once I rented out my SFH, I was then able to buy a duplex in 2022. I renovated both units and one unit became my home and the other I rented out. There is no way I could have purchased 2 houses in 2 years had I needed to put 20% down each time!
With the new lending guidelines put into place earlier this month there are now less restrictions and the ability to purchase up to a 4 unit multi-family property with only 5% down which further increases your purchasing power. The new loan limits are:
1 unit = $726,200
2 unit = $929,850
3 unit = $1,123,900
4 unit = $1,396,800
While using a 5% down payment option has come at the cost of me having to move (and typically into an active renovation) the sacrifice has been well worth it. The pros and cons of 5% down payment options are not for everyone, read below to learn more.
PROS
Accessibility
Rather than waiting to save up a larger down payment, a 5% down payment loan allows you to enter the housing market sooner, potentially benefiting from increasing property values. If I had waited until I had 20% down to purchase a property probably still be waiting and would have missed out on the low interest rates of 2020-2022 and rapid appreciation of the housing market.
Preserve Cash
By putting down a smaller down payment, you can retain more cash for emergencies, investments, or other purposes. With my investment properties I used this excess cash to immediately renovate the properties, force value into them and mitigate one of the cons listed below, PMI, as soon as possible.
House Hacking
My personal favorite, with the new lending guidelines you can now put only 5% down on up to a 4-unit property up to $1,396,800. The buying power that gives you as an individual investor is insane. It takes more diligence to find the right deal but purchasing a 2/3/4 unit property often means that you will live for free (or a profit) if you rent out the other units.
CONS
Higher Monthly Payments
A smaller down payment means a larger loan amount, leading to higher monthly mortgage payments. Particularly if you are looking to house hack it can be harder to find a property priced low enough that you will cash flow or even break even monthly.
Private Mortgage Insurance (PMI)
Typically, with a down payment less than 20%, you have to pay private mortgage insurance (PMI), further increasing monthly costs. Once you have 20% equity of the value of your home you can remove the monthly PMI payment this can happen by paying down your mortgage, the house appreciating, or as I mentioned above through forcing value into the home by renovating. Always check with your lender on your specific loan, I have seen that multifamily can require 65%-70% loan-to-value ratio to remove PMI. Similarly you lender can get multiple quotes for you on PMI, always ask.
Increased Requirements / Primary Residence
While this was a pro listed above, putting only 5% down means this property needs to be your primary residence which will exclude many investors from being able to use this option (but not first-time home buyers!). Similarly, these loans sometimes have more aggressive requirements for credit score and debt-to-income ratio.
As I always say, there are many variables to real estate down payment is one. While putting 5% down is a powerful option, particularly for first time home buyers or new investors, it is not the only option to make real estate more accessible to you. Interest rate, purchase price, property taxes, home condition, etc. etc. are all variables you can use to your advantage to find an amazing deal for YOU!
xx,
Claire
