In recent months, we have noticed a subtle increase in the number of blog posts suggesting would-be investors can break into real estate without putting any money down. The posts offer all sorts of tips that make it seem like it is possible to buy a rental property without a down payment. But is that really the case? And more importantly, do hard money lenders require a down payment?

The simple answer is ‘yes’. Hard money lenders do require down payments, just like traditional lenders. It’s a normal part of the business. How much of a down payment depends on how a lender chooses to operate. More often than not, down payments are sizable. Assuming it is possible to purchase an investment property with little to nothing down just isn’t realistic.

The Point of Down Payments

Down payments are not unique to one form of lending or another. They are required when you want to buy a residential property as a primary residence. They are often required when you want to buy a brand-new car. Hard money lenders require them regardless of how funds are going to be used. There is a good reason for all of this.

Any form of lending involves risk. Both parties assume some of that risk. More risk ultimately falls on the lender due to the nature of the transaction. But lenders do not want to assume all the risk themselves. Requiring a down payment forces borrowers to have some skin in the game, so to speak.

Requiring borrowers to make a sizable down payment increases the chances that there will be no hiccups down the road. The borrower will make good on the loan and that will be that. And more often than not, that is exactly how things work out.

Don’t Forget the LTV

Hand-in-hand with down payments is the loan-to-value (LTV) ratio. If you are not familiar with LTV, it’s pretty easy to understand. LTV is a ratio that compares the amount of money a lender is willing to lend against the value of the property being obtained. Lenders determine their LTVs based on a variety of factors.

LTV plays into the size of the down payment a borrower needs. If a lender’s typical LTV won’t allow lending more than half of a property’s total purchase price, the borrower will have to come up with the remaining amount in cash or through another credit instrument.

As always, remember that hard money lending is based on assets. Most hard money loans go toward commercial real estate transactions. A property being obtained through a loan is a valuable asset. It becomes collateral for the loan itself. Therefore, a more valuable asset is more likely to be approved for hard money.

Protecting Both Parties

In closing, don’t think of the down payment as a bad thing. It’s not really a hindrance to purchasing investment property using hard money. The down payment is actually a valuable tool that protects both parties in the transaction.

Your down payment protects you against unwise investments. Having to put a significant amount of your own cash into a deal causes you to be more cautious. It encourages you to properly assess any deal before you jump in. That’s a good thing.

A down payment also protects your lender to some degree. Down payments allow lenders to lend considerably less than the targeted property is worth, protecting their investment against undue risk. Down payments also prove to lenders that borrowers are serious about investing. In the end, they are more comfortable about lending on projects they are confident will succeed.