How much deposit do I need for an investment property?

When it comes to a deposit for an investment property, investors often ask two questions:

• How much deposit do I need?

• Where do I get the deposit from?

These are questions we get asked by property investors all the time at Opes Partners. So, in this article you’ll get the answers to both. This includes how to buy an investment property without a single dollar for your cash deposit.

Quick points:

• Investors require a higher deposit than owner-occupiers (depending on the property)
• Investors need a 20% deposit to buy a New Build property
• Investors need a 35% deposit to buy an existing property
• Investors do not need to have their deposit money in cash; they can often borrow this.

And if you have a question, write your questions or thoughts in the comments section below.

How much deposit do I need to buy an investment property?

If you’re an investor, the deposit required depends on the property you purchase.

If you’re a property investor, you need the following:

• 20% deposit for New Build properties
• 35% deposit for existing properties
• 50% deposit (in some circumstances) for bare land, smaller apartments or high-yielding dual-key apartments.

This variation is due to Loan to Value Ratio restrictions (more on this below).

The differences are substantial in dollar amounts and will dictate what property you invest in.

For instance, let’s say you can buy three $1 million properties.

One is a New Build townhouse being built in Auckland by a developer. This property requires a 20% deposit.

The next is a house in Christchurch that was built 20 years ago. This makes it an existing property, and investors will require a 35% deposit.

The final property is a dual-key apartment in Wellington. Because this is a specific type of property, it requires a 50% deposit.

All 3 properties cost $1 million. But the deposit you need changes:

• Property A (New Build) – $200,000
• Property B (Existing) – $350,000
• Property C (Dual Key) – $500,000.

For example, purchasing Property B (the existing property) requires $150,000 more than Property A … even though they both cost $1 million.

Here’s a flow chart that shows how much deposit is required for investors, owner-occupiers and first home buyers.

What are LVR restrictions?

LVR is the acronym for Loan to Value Ratio restrictions. These rules dictate how much a bank can lend you against your property compared to its value.

Or, to put it another way, LVRs set the restriction for just how much money a bank can loan to you compared to the value of your house.

The LVR restrictions are stricter for investors than for other types of borrowers.

For investors, the bank can only lend you up to 65% of your property’s value (for an existing property). That means you – as an investor ­– need to put in the rest of the money (35%) as a deposit.

Case study: examples of real-life deposits

Using real-world examples, let’s look at how deposits can change based on the property.

Example #1 New Build – Belfast, Christchurch

This property is available to Opes Partner investors (at the time of writing).

It is a 4-bedroom standalone house based in Belfast, Christchurch, and costs $769,000.

The deposit required for this property is 20%. Therefore, an investor wanting to buy this house needs a $153,800 deposit.

Example #2 Existing property – Highcliff, Dunedin

Here is another property currently available for purchase on Trade Me.

It’s also a 4-bedroom standalone house, this time based in Dunedin. Its asking price is currently $649,000.

If an investor bought this property and paid the asking price, they would need a 35% deposit. That means putting down $227,150.

Even though the existing property is cheaper, it requires a $73,350 higher deposit.

How do (most) property investors get the deposit?

Many people new to property investment are often surprised to hear that most investors don’t use cash for their deposits.

Instead, they use their equity (wealth) within their home as a deposit.

The way you do this is –

• you take out a new loan secured against your house, and
• you use that money as the deposit for your investment

The extra amount you can borrow against your own home (or another property) is called ‘usable equity’. Here’s how it works

If you’ve owned your own home for a while two things are likely to have happened:

• You’ve paid down some of your mortgage
• Your property has probably also increased in value.

This creates wealth within your home because it’s worth more, and you’ve got less debt held against it.

You can borrow against this wealth for a deposit for an investment property.

The formula for calculating your usable equity in your own home is as follows:

(Home Value x 0.8) – Personal Mortgage = Usable Equity.

You can also use our calculator to run the numbers for you:

Equity and leverage calculator.

What are my next steps?

Returning to our initial question: How much deposit do you need to buy an investment property?

The answer depends on what sort of property you want to buy.

For a New Build, you need 20%. For an existing property, you need 35%. Or for something more specific, you may need 50%.