Want to Buy an Investment Property but Don’t Have a Large Down Payment? Fannie Mae Just Made It Easier for You…

It’s often said that the majority of millionaires made their money investing in real estate.
That’s certainly inspiring, but it can also seem entirely out of reach. After all, it’s also often said that you need money to make money. And when it comes to real estate investing, the money you need in order to make money comes in the form of a down payment.

So you probably picture real estate tycoons as people who came from money and simply inherited portfolios of property, or bought them with family money passed down over generations. But the truth is, 88% of millionaires are self-made according to a 2017 survey from Fidelity Investments!

Arnold Schwarzenegger is a great example of building wealth through real estate. Before he was a movie star, Arnold would take the money he won as a bodybuilder and use it as down payment on a multifamily property. He’d then live in one unit, while renting out the others. As he built up equity and cash flow, he’d buy another property. He didn’t make his millions by acting. Making millions by owning real estate gave him the financial freedom to pursue acting.

Unfortunately, buying a multifamily property has often required a down payment of between 15-25%. In theory, lenders have always looked at investment properties as something a person could more easily walk away from if they didn’t have a good amount of their own money invested in it, so they’ve typically required a larger down payment on investment properties.

To be fair, it is easier for someone to default on an investment property than it is on their own personal residence. People tend to be more careful about keeping a roof over their heads, which is why lenders have offered lower down payment options for owner-occupied personal residences for quite some time.

While plenty of people have used lower down payments to buy a single-family home to live in and build wealth, most haven’t been able to easily take real estate investing to the next level by buying multi-family houses due to thinking they need a larger down payment for one.

5% Down Payment Loans for Multifamily Properties

If a 15-25% down payment has been a hurdle for you to invest in a multifamily property, you might be interested to know that Fannie Mae just announced that they will be offering loans for multifamily homes with as little as 5% down payment for owner-occupied properties with 2, 3 or 4 units.

The Federal Housing Administration (FHA) has actually been offering loans for multifamily properties with as low as a 3.5% down payment for quite some time, so this might not seem earth-shattering to anyone who already knew there was a way to buy a multifamily with a low down payment. But it serves as a great reminder that it’s possible to buy a multifamily with a lower down payment, and it’s another option in the market for prospective investors to consider.

There are also some key differences between the low down payment programs Fannie Mae and FHA respectively offer:

  • When you put down less than 20% you will be required to pay private mortgage insurance (PMI) on either of these products. But with an FHA loan, you have to pay it for the entire length of the loan. That monthly surcharge will go away once you hit 20% equity on a Fannie Mae loan.
  • While it’s ideal for a rental property to not only cover your entire mortgage but also provide a positive cash flow, it’s not necessary for a multifamily to make sense as an investment depending on your situation. FHA requires that the property is “self-sufficient,” and rents must cover the entire amount of your mortgage payment on properties with 3-4 units. Fannie Mae does not require this.

Who Is This a Good Opportunity For?

These loans require that you live in the property, so it isn’t ideal if you’re looking for a straight up investment property you won’t live in. Loans with owner-occupied terms typically require that you personally move into the property within 60 days of closing on the loan, and live in the property for at least a year or two. So this is a great opportunity for several types of people, such as:

  • First-time home buyers who want to combine their first home purchase with their first investment property.
  • Home buyers who’ve been priced out of the single-family market and could use some income generated by their property to lower their housing costs.
  • Renters with roommates who want to become property owners and want to buy a place to live in and rent out the other units to their roommates.
  • “Home hackers” who want to live in one unit of the property while renting out the others and then repeat the process by buying another owner-occupied rental property after they’ve lived in it for the required amount of time.
  • Investors who want to take advantage of the lower down payment and can adjust their lifestyle and living arrangements for a period of time by living in their investment property.

If you fit any of those descriptions, you should reach out to your local real estate agent for a list of the mortgage advisors they trust to start the application process now. While you can’t close on one of these loans until November 18, 2023, you can get pre-approved, start getting your documentation and application ready, and look for a property you want to buy so you can close as early as November of this year and get on your way to becoming a real estate investor!

The Takeaway:

Coming up with a down payment to buy an investment property is often a hurdle for many people who want to buy a multifamily building. But Fannie Mae has just announced they’re now offering a low down payment loan which only requires 5% instead of the typical 15-25% they’ve required in the past.

This is a great opportunity to break into real estate investing for anyone who has a low down payment and can live in their investment property for a period of time.