So you’re ready to buy an investment property, but you aren’t sure what your financing options are. When it comes to investment property financing, the first deal can be the hardest because there is a learning curve associated with this process. Here are several tips on what you need to know to find financing under different circumstances.
Investment property financing options
You can easily fund your property investment if you have ready cash, but it isn’t this simple for most people. In fact, even those who have cash would rather use leverage to control more overall property. Here are the most common methods of investment property financing:
- Traditional mortgages.
Depending on your income and credit, you can fund your purchase with a conventional mortgage, spreading out the payments for 15 to 30 years. These loans are available through banks, credit unions, and online lenders.
- Business line of credit.
If you have a business with positive cash flow and don’t mind jumping through some hoops, you might qualify for an unsecured line of credit.
- Hard money lenders.
These are short-term lenders who look more at your real estate deal as opposed to your income/credit. A hard money lender may not work with a beginning real estate investor, and these loans only work if you plan to sell the property or refinance quickly.
- Private money.
Some wealthy investors might be available to you for real estate loans since the property secures the loan. These lenders might also include family or friends.
If you need a large sum of money for your real estate investment, you might consider a real estate syndication platform, such as RealtyShares. Real estate syndication is a pool of real estate investors that workslike crowdfunding for property purchases. Mortgage loans
Conventional mortgage loans are available to finance investment properties. These are a good choice if you have good credit and plan to hold onto the property long-term as a rental. A conventional mortgage may not be a good option for quick deals because it can take weeks to months to close. The benefit of conventional mortgages is that they have competitive interest rates and mortgage interest payments are tax deductible.
Home equity line of credit
Another option is to tap into your current home’s equity to buy an investment property. If you have sufficient equity in your home, you can take out a home equity line of credit (HELOC) to finance investment properties. This is a good option for both short-term and long-range real estate financing projects.
The interest payments made on a HELOC might be tax-deductible. There is a downside to this type of financing, however. You are using your current home as collateral for the loan on your investment property purchases. If you default, you could risk foreclosure.
It’s a common misconception that you can’t use a VA loan for an investment property. While it is true you can’t buy commercial properties or flip homes with a VA loan, there are some options to consider.
VA rules do state you must live in the home for a period of time as your primary residence.But that doesn’t mean you can’t rent it out later. You can also purchase up to a fourplex, live in one of the units, and rent out the other three to generate income.
To qualify for a VA loan, borrowers must have sufficient income and credit as well as a valid Certificate of Eligibility. A certificate of eligibility is a document that indicates a borrower qualifies for a VA loan.
Business line of credit
Another way to finance investment properties is with a line of credit. Few personal lines of credit will have sufficient limits for real estate investment, but a business line of credit might help you achieve your goals. A specified maximum amount of funding can be drawn from on an as-needed basis. Credit lines can be as high as $500,000.
If you have an existing business with positive revenue and financials, you might qualify for a line of credit that has several benefits. The credit line isn’t secured, so you aren’t risking your home or other assets with the loan. The credit is flexible, meaning you can access as much as you need, up to your limit. Payments can be paid in full or as minimum payments, depending on your budget constraints.
A final benefit of a line of credit is that you don’t have to worry about the down payment constraints of some conventional mortgages.
When you buy an investment property with a conventional mortgage, you typically need to have 20% in cash for a down payment. This is just the beginning. If it’s a multi-unit property, that number could go up to 25% or more. There is no mortgage insurance with investment loans, so lenders need to protect the equity in their investments by requiring higher down payments. The only exception is with a VA mortgage, where you might get a loan on that duplex or fourplex with no money down.
Other restrictions could apply as well. For example, if you are buying into a condo complex, usually 50% or more of the condos must be owner owned and occupied. There may also be restrictions on investments in new developments.
Lenders will want at least two years of W-2 income, tax returns, and bank statements. If you are self-employed, you might need to get your CPA involved to confirm income and financials. Finally, your personal credit score is a key ingredient to finance approval. If you don’t know your score, you can get it for free here.
Buying with bad credit
You don’t need top credit scores to get a mortgage loan for an investment property. A better score will get you more favorable rates, but you can get approved for a mortgage with a credit score of 630 or better.
If your score doesn’t reach those levels, you should look into hard money lenders and real estate syndicates for investment money. Just know that these loans will come with higher interest rates.
How to compare lenders
Things to consider when you compare lenders are the annual percentage rate (APR), terms, closing costs, and speed of funding. With investment properties, sometimes the speed of funding can be the most important factor.
Your particular goals will play an important role when you compare lenders. For example, if a quick flip is your goal, a higher interest rate might not matter as much for a loan that funds in 48 hours. On the other hand, if you’re investing in a rental property, the total cost of borrowing money is crucial because it will eat into your long-term profits. To research investment property mortgage lenders, find the best mortgage companies here.
FAQ on financing investment property
What is classified as an investment property?
An investment property is a property that is: not your primary residence, and is purchased or used in order to generate income, profit from appreciation, or to take advantage of certain tax benefits.
Do banks give loans for investment properties?
Investment property loans are usually found through online mortgage providers, investor-only lenders, and national banks. Investment property loan amounts typically range from $45,000 to $2,000,000 or higher. Rental property loans usually require a minimum down payment of 20 percent.
Are mortgage rates higher for investment property?
Investment property mortgage rates are higher than those for primary residences because they are viewed as higher risk. Still, rental properties are usually a great investment in the long run, and a slightly higher rate might not make that much of a difference in payment.
Can You Use A HELOC For A Down Payment on An Investment Property?
A HELOC can be used to buy an investment property. In fact, if you are going to use a HELOC on anything, you might as well put it into a sound investment. Unleveraged equity is, after all, dead money that could end up costing you in the long run.
Can investment property be depreciated?
Rental property depreciation allows investors write off the structure and improvements to the property over a period of time. This is an “expense” that you can use as a write-off on your taxes. However, you can only depreciate the improvements to the structure itself -not the land.