Everything about investment property lending follows from one fact: default insurance is not available on a property you do not occupy.
Insurance is what allows five percent down on a home. Remove it and the lender carries the full risk, so they require real equity behind the loan. Twenty percent is the floor, and it is a genuine floor rather than a guideline. Some lenders want twenty-five or thirty on smaller or less liquid properties.
That single rule reshapes the whole exercise. On a $400,000 rental you need $80,000 plus closing costs, and none of it can be borrowed against the property itself.
Where the down payment can come from
Savings, obviously. But the source most investors actually use is equity in a property they already own.
A refinance of your home, or a home equity line of credit, releases funds at rates far below anything else available, and those funds count as your own for the purchase. There is a catch worth understanding: the payment on that borrowing counts against your debt ratios when you apply for the rental mortgage, so the two transactions have to be modelled together rather than in sequence. See equity take-out for investment.
Gifted funds are generally not acceptable for an investment property in the way they are for a home. Borrowed down payments from unsecured credit are not acceptable anywhere.
One genuine advantage: interest on money borrowed to earn income is usually deductible against that income. That materially changes the real cost of using a line of credit to fund a rental deposit, and it is worth a conversation with an accountant before you structure it, because keeping the borrowing traceable to the investment matters.
Qualifying: it is not the property that qualifies, it is you
A common misunderstanding is that a rental with strong cash flow qualifies itself. On residential investment property with one to four units, it does not. You qualify, using your income, with the rental income contributing partially.
How much it contributes depends on the method the lender uses, and the methods differ enormously. Some offset a percentage of the rent against the property's costs. Others add a portion of the net rent to your income. On the same property the two approaches produce very different results, and choosing the right lender is frequently the difference between approval and decline. That mechanic is covered properly on rental property mortgages.
The stress test applies here too: you qualify at the greater of your contract rate plus two percent or 5.25 percent.
What it costs beyond the down payment
Rate. A premium over owner-occupied pricing, commonly a quarter to half a point, because the lender is taking more risk. In a downturn people pay their own mortgage before their rental's.
Amortisation. Up to thirty years is available on uninsured lending, which improves cash flow at the cost of total interest. On a rental this is a legitimate tool, since the objective is often monthly performance rather than fastest payoff.
Appraisal. Always required, and on a rental the appraiser will also assess market rent, which some lenders use in preference to your actual lease.
Higher scrutiny of the property. Condition matters more, because a lender is thinking about resale in a forced sale.
The property types that complicate things
Condominiums. Some corporations restrict or prohibit rentals. Check the bylaws during your condition period, because a rental restriction can make the entire plan impossible after you have committed.
Small or rural properties. Fewer lenders, thinner comparables, and some will decline below a population threshold.
Properties with unpermitted suites. The income generally cannot be counted, and some lenders view the property less favourably for having one. This is the single most common surprise on a first rental purchase.
Five or more units. No longer residential lending at all. That is commercial, assessed on the property's own income rather than yours. See commercial financing.
Before you buy the first one
Think about the second one. The structure of your first purchase determines whether a second is possible, because every rental adds debt to your ratios while contributing only part of its rent.
Most investors hit a wall somewhere around the fourth or fifth property, and the ones who get past it structured the early purchases with that in mind. It is far easier to plan for at the start than to unwind later. See financing multiple rentals.