When people save for a first rental, they save for the down payment. It’s the biggest check you’ll write, but it isn’t the whole bill, and on the house below the rest comes to nearly half as much again.
What do you need cash for when you buy a rental?
Four things, and the first one gets most of the attention.
- The down payment, the part of the price the loan doesn’t cover.
- Closing costs, which include the lender’s fees, title insurance, recording fees, and a first round of property taxes and insurance paid upfront.
- Work before the first tenant, such as paint, flooring, appliances and whatever the inspection turns up.
- Reserves, money that has to be sitting in your accounts after closing, so the loan still gets paid if the house sits empty or something breaks. You don’t spend it, but a lender will ask to see it before you close.
A $250,000 rental, added up
Take a single-family house at $250,000, bought with 20% down on a 30-year loan at 7%. With $250 a month of property taxes and $117 of insurance, the monthly payment comes to $1,698.
| Cash | |
|---|---|
| Down payment (20%) | $50,000 |
| Closing costs (3% of the price) | $7,500 |
| Paint, flooring and repairs before the first tenant | $5,000 |
| Reserves: six months of the $1,698 payment | $10,188 |
| Cash you need | $72,688 |
These are example figures, not a quote.
The first three lines are what the rental calculator counts as cash invested, $62,500 here. The reserves sit on top. They stay in your account, but they have to be there before you close, so they belong in what you save.
Closing costs vary with the lender, the state and the loan, so the 3% above is a placeholder. A lender’s Loan Estimate breaks them down for your loan, and the Consumer Financial Protection Bureau suggests getting estimates from more than one lender so you can compare.
How much do you have to put down on a rental?
More than on a home you live in. Freddie Mac’s limits for the loans it buys let a standard loan, one without government backing, cover up to 85% of the price of a one-unit rental. For a rental with two to four units, the limit is 75%. That means at least 15% down on a single-family rental, and 25% on a duplex, triplex or fourplex you don’t live in. A lender can ask for more.
This example uses 20%, because below that a standard loan usually comes with private mortgage insurance. It protects the lender, not you, and it’s most often added to your monthly payment. On this house, 15% down would cut the down payment by $12,500. The bigger loan and the insurance would both raise the monthly payment, though, and the reserves along with it.
What are reserves, and how much do lenders want?
Reserves are a lender’s proof that one bad month won’t sink the loan. For a rental, the reserve rules in Fannie Mae’s automated approval system call for six months of the new loan’s payment. That’s the full payment: principal, interest, property taxes, insurance and any association dues. On this house, it’s the $10,188 in the table.
Already own financed rentals? The same rules add 2% of what you still owe on them when you have one to four financed properties, and more beyond that. The mortgage on the home you live in is left out of that sum.
Can a gift or the seller cover part of it?
A gift can’t. Fannie Mae’s rules say plainly that gifts aren’t allowed on an investment property, and Freddie Mac’s rules for rental loans say the same. The cash has to be yours.
The seller can help, within a limit. On a rental, Fannie Mae caps that help at 2% of the price, or of the appraised value if that’s lower. The cap covers the seller and anyone else with a stake in the sale, and the money can go toward closing costs, not the down payment or reserves. On this house that’s up to $5,000, which would bring $72,688 down to $67,688. It’s something to ask for in your offer, and a seller who agrees may push back on the price.
How can you buy with less cash?
Live in it. Lenders ask far less of someone buying a home to live in, and a building with up to four units still counts as your home if you live in one of the units.
- A standard loan: Freddie Mac’s limits allow as little as 5% down on a two-to-four-unit building you live in.
- An FHA loan, which the Federal Housing Administration insures: as little as 3.5% down on one to four units. It carries its own mortgage insurance, and at least one borrower has to move in within 60 days and live there for at least a year.
| Down payment | |
|---|---|
| Rent out both units (25%) | $100,000 |
| Live in one unit, standard loan (5%) | $20,000 |
| Live in one unit, FHA loan (3.5%) | $14,000 |
Living there changes more than the loan. The people next door are your tenants, and you’re the landlord on call. Before you count on the other unit’s rent, check it the way this duplex analysis does. Three- and four-unit buildings also face an extra FHA test of whether the building’s rents could cover the mortgage payment, and need three months of payments in reserve.
How do you work out your own number?
- Run the house in the rental calculator. Its cash invested line adds the down payment, closing costs and work before the first tenant.
- Add six months of the full monthly payment for reserves, plus 2% of what you owe on any other financed rentals.
- Replace the closing-cost guess with a lender’s Loan Estimate as soon as you have one.
That total is the number to save for. If it’s out of reach, the biggest levers are the price, the down payment and whether you live in the building. The 12-number checklist covers what else to confirm before you make an offer.