Financing a Rental Property
The loan terms change the monthly number more than most people expect. Hereβs how I think about financing now.
The story
On an early deal I focused on the interest rate and ignored the down payment and closing costs. The rate looked fine, but the cash I needed at closing was higher than I had planned. I scrambled to cover it and then realized the monthly payment left almost no room for a repair. The property still worked, but only because rents rose later. That was luck, not planning. Since then I treat the down payment, rate, and monthly payment as one package instead of three separate decisions.
Known mistakes
- Shopping only on interest rate and ignoring points, fees, and down payment.
- Assuming you can refinance quickly if the numbers are tight at closing.
- Using an adjustable rate without a clear plan for what happens when it adjusts.
- Forgetting that a larger down payment reduces cash flow risk but also reduces cash available for the next deal or reserves.
- Not running the cash-flow numbers with the actual loan terms before making an offer.
What I would do if I were starting over
- Get a realistic pre-approval that includes the down payment and estimated closing costs.
- Run the monthly payment with the exact rate and term you are likely to receive.
- Compare two or three scenarios: lower down payment with higher payment, and higher down payment with lower payment.
- Leave a reserve equal to at least a few months of the mortgage after closing.
- Ask the lender what changes if the appraisal comes in low.
- Only make an offer once the monthly number still works with a conservative rent and a repair reserve.
- Document the final loan terms next to your original analysis so you can see what changed.
Financing is not separate from the deal. It is part of the monthly math. Run it early and run it again before you commit.