Investment property loans are specialized mortgages that provide the financial support you need to purchase income-generating properties, whether you’re looking to rent them out or flip them for a profit. However, keep in mind that mortgage rates for investment properties are typically higher than those for your primary residence, and qualifying for these loans often involves meeting stricter requirements. But don’t let that discourage you — investment properties offer the potential for substantial returns. There are many options of property loans, and each option has its pros and cons, so it’s important to weigh them carefully. Keep in mind that securing a loan for an investment property is usually more challenging due to stricter qualification requirements, larger down payment requirements, higher interest rates, and the preference for borrowers with a real estate investment history. However, with proper planning and research, you can find the right loan and make your investment property dreams a reality.
Welcome to the world of investment property loans! While these loans can provide you with the financial support you need, it’s essential to understand that the mortgage rates for investment properties are usually higher compared to those for your primary residence. Additionally, qualifying for an investment property loan entails meeting more stringent requirements.
What are investment properties?
Investment properties are assets purchased to generate income through renting or flipping. An investment property is a deliberate investment, acquired with the explicit goal of reaping substantial returns. Whether you choose to refurbish and sell it at a higher price or lease it to eager tenants, the key is to capitalize on its potential for profitability.
What is an investment property loan?
Investment property loans are special mortgages used for acquiring income-producing properties, whether you’re eyeing rental income or seeking to flip houses.
Investment property loans can allow you to access properties primed for generating substantial rental revenue. Landlords can reap the benefits of monthly income while their property appreciates in value. Alternatively, in the fast-paced world of house flipping, you can buy fixer-uppers, renovate them, and sell them for a nice profit.
Short-term hard money investor loans are nimble financial tools that provide you with the means to purchase properties with the intention of repairing and selling them.
Pros and cons of investment property loans
Flipping homes and renting properties come with their positives and negatives.
Pros and cons of house flipping
Here is a list of the benefits and drawbacks to consider.
- Large profits are received in a lump sum
- Potential for fast turnarounds and large returns
- Higher risk and potential for higher losses
- Renovation costs can be high and eat up potential returns
- Subject to capital gains taxes
Pros and cons of owning a rental property
Here is a list of the benefits and drawbacks to consider.
- Creates a monthly income stream
- Comes with tax benefits for rental owners
- Tenants help pay for the mortgage
- Property maintenance costs add up
- Managing property can be expensive as well, eating into income streams
- Possibility of issues with tenants
Types of investment property loans
The following are the different types of investment property loans you can apply for:
The conventional loan program stands out as the standard option for purchasing an investment property without any specific occupancy requirements. Unlike government-backed mortgages, you can qualify for a conventional loan without needing to live on the property.
When it comes to down payments, the program mandates a minimum of 25% down for single-family homes and a slightly higher requirement of 30% down for two- to four-unit properties. This ensures that you have a significant stake in the property, reducing the lender’s risk and establishing your dedication to the investment venture.
Backed by the Federal Housing Administration (FHA), these mortgages allow you to buy a two- to four-unit home. To qualify, you must live in one of the units for at least 12 months, while the remaining units can be rented out to generate income.
VA joint loans
Exclusively available to eligible military borrowers, VA joint loans are designed for purchasing multifamily properties with up to seven units. To qualify, you must live in one of the units. The U.S. Department of Veterans Affairs guarantees these loans without a down payment requirement.
Borrowers who don’t meet the criteria for the aforementioned programs may still be eligible for non-qualified mortgage (non-QM) loans. These loans are based primarily on the rental income generated by the property being purchased. However, non-QM loans typically have higher down payment requirements and interest rates compared to regular loan programs.
In some cases, sellers are willing to act as lenders and provide temporary financing. This arrangement usually requires a substantial nonrefundable down payment. Some owner financing agreements may also involve a balloon payment, which means you must pay off the entire loan balance within a specified period or the owner regains ownership of the property.
Home equity loan/HELOC
If you currently own a property with a significant amount of equity, you can tap into it through a home equity loan or a home equity line of credit (HELOC). These options allow you to borrow against your equity while keeping your existing mortgage intact. A home equity loan provides a lump sum with a fixed interest rate, while a HELOC functions like a revolving credit line that you can use and pay off within a set period.
With a cash-out refinance, you can obtain a mortgage for an amount greater than your current loan balance and receive the difference in cash. This cash can then be used to purchase an investment property.
Hard money loans
These loans are commonly utilized by investors involved in house flipping. Hard money lenders offer funds based on the expectation of a quick repayment. However, hard money loans often require a minimum 25% down payment and come with higher interest rates, upfront costs, and potential prepayment penalties.
Tips for obtaining investment property loans
Here are some tips you can use to obtain an investment property loan with confidence:
Explore multiple lenders
Because many lenders offer investment property loan options, it’s crucial to shop around and compare rates and terms. Rates can vary significantly between lenders, so take the time to research and reach out to different lenders to find the best fit for your needs.
Fill out a loan application
If you’re applying for a standard loan program, such as a conventional, FHA, or VA loan, the application process is similar to any other loan application. However, keep in mind that non-QM lenders and hard money lenders may have specific processes or application systems.
Provide extra asset documentation
To support your loan application, ensure you have at least two months’ worth of bank statements on hand. Additionally, gather any current leases or rental information for the property you’re purchasing. Some lenders may allow a portion of your retirement or 401(k) vesting to count toward meeting reserve requirements, so it’s useful to have a recent statement available.
Pay for an investment appraisal
An investment appraisal is a necessary part of the loan process. This entails an additional report detailing the average rent collected on comparable properties in the area. In some cases, the rental income from this report can be considered to help you qualify for a loan.
Review your closing disclosure
Once your loan conditions are met and the appraisal is complete, the lender will issue a closing disclosure three business days before the closing date. Take the time to carefully review the document, ensuring that all the figures align with your expectations. If you’re obtaining a hard money loan, pay particular attention to any prepayment penalties or clauses related to “guaranteed interest.” Hard money lenders often aim to earn a set amount of interest, regardless of how quickly you repay the loan.
Gather your funds and close
As the closing date approaches, make arrangements to gather your funds. This may involve sending a wire transfer or obtaining a cashier’s check for the closing amount. Once you arrive at the closing, sign the necessary mortgage paperwork and submit your funds. Upon completion, your loan funds are disbursed, and the property is officially recorded in your name.
Is it easier to get a loan for an investment property?
Securing a loan for an investment property can be more challenging compared to obtaining a loan for a primary residence. Here are a few reasons why:
- Stricter qualification requirements: Lenders have higher standards for investment property loans, considering income fluctuations and managing multiple properties. Meeting higher credit score requirements and providing extensive documentation is often necessary.
- Larger down payment: Investment property loans typically require a minimum down payment of 20% to 25%. This demonstrates commitment and reduces lender risk.
- Higher interest rates: Investment property mortgage rates are higher than primary residences. This compensates for increased risk, resulting in higher monthly payments and overall borrowing costs.
- Experience and track record: Lenders may favor borrowers with a successful real estate investment history, making it easier to secure financing compared to first-time investors.
Can you get a 30-year loan on an investment property?
You can secure a 30-year loan for an investment property, such as a 30-year fixed-rate mortgage, from various lenders. However, loan availability and terms vary based on factors like the lender, the borrower’s financial qualifications, and the specific investment property. Interest rates for investment property loans may be slightly higher than those for primary residences. It’s advised to consult with lenders and explore different loan options to find the best financing fit for your investment property.
Do banks lend on investment properties?
Banks and financial institutions provide loans for investment properties with specialized loan programs. These loans have unique terms, requirements, and interest rates compared to loans for primary residences. Lenders will assess factors like potential rental income, borrower qualifications, and investment strategy before issuing an investment property loan.
What is a good ROI on a rental property?
A good return on investment (ROI) for a rental property can vary depending on several factors, including location, property type, market conditions, and individual investment goals. However, as a general guideline, many real estate investors aim for an ROI of at least 12%.
What age is best to buy an investment property?
There is no real best age to buy an investment property, although you may not be allowed to buy a property or get a mortgage if you are under 18 in some jurisdictions. The best time to buy an investment property depends on a number of other factors, such as your financial situation, investment goals, risk tolerance, and personal circumstances.
- Investment properties are assets purchased with the goal of generating income through renting or flipping.
- Investment property loans are mortgages specifically designed for acquiring income-producing properties.
- Mortgage rates for investment properties are usually higher compared to primary residences, and qualifying for these loans requires meeting more stringent requirements.
- The different types of investment property loans are conventional loans, FHA loans, VA joint loans, non-QM loans, owner financing, home equity loans/HELOCs, cash-out refinancing, and hard money loans.
- Advantages of house flipping include large profits, the potential for fast turnarounds and large returns, and creative expression. Downsides include higher risk, the potential for higher losses, renovation costs, and capital gains taxes.
- The upsides of owning a rental property include creating a monthly income stream, tax benefits, and tenants helping to pay the mortgage. The drawbacks include property maintenance costs, large expenses, and possible issues with tenants.
- To increase your chances of obtaining an investment property loan, you should explore multiple lenders, fill out a loan application, provide extra asset documentation, pay for an investment appraisal, review the closing disclosure, and gather funds for closing.
View Article Sources
- Brueggeman, W. B., & Fisher, J. W. (1989). Real Estate Finance and Investments.
- Brammall, B. (2015). Mortgages Made Easy: 8 Steps to Smart Borrowing for Homes and Investment Properties. John Wiley & Sons.
Allan Du is a personal finance writer passionate about helping people take control of their finances. Allan strives to present readers with the right knowledge and tools, so they can make informed decisions about their money and build wealth. When he is not writing about finance, Allan enjoys pursuing his other interests, including powerlifting, kickboxing, and investing. He is an active follower of economic and political trends, always keeping watch on the latest developments that could impact the financial world.