Investment Property Loans: How to Choose the Best Option
- Plan to use the property for investment purposes only? A conventional loan is likely your most economical bet.
- Planning to live in the home? Choosing a government-backed loan — like an FHA or VA loan — could save you money.
- Need to side-step traditional income or documentation requirements? A non-qualified mortgage — like a DSCR loan or a seller-financed mortgage — can work with your unique needs.
Real estate investing can help you build wealth, but choosing the wrong financing can quickly eat into your profits. Investment property loans often come with tougher qualifying requirements, heftier down payments and higher interest rates than a typical mortgage. The best option for you depends heavily on your goals, budget and experience level.
Whether you’re buying your first rental property, house hacking a duplex or financing a fix-and-flip, understanding how investment property loans work can help you avoid costly mistakes. We’ll break down the different loan options available, how lenders evaluate investment properties and what you can do to improve your approval odds and secure a more affordable loan.
What is an investment property loan?
Loans for an investment property are mortgages used to purchase an income-generating property. That includes properties you plan to rent, or a house you want to fix up and sell for a profit (also known as “house flipping”).
Strictly speaking, investment property loans are mortgages designed to finance these types of properties. But you also have other options that give you access to a lump sum of cash and aren’t specifically for real estate investing. We’ll cover both types of options below.
You can’t use a standard home loan to buy a property unless you plan to occupy it as your primary residence. In most cases, this just isn’t viable for real estate investors.
There is one big exception: It’s fairly common to use a standard home loan to buy a property with multiple units and live in one of them while renting out the rest (this is known as “house hacking”).
An investment property is real estate you buy to earn income rather than live in. For the purposes of this article, we’re focused on residential real estate loans, which typically only allow financing on properties between one and four units.
How does the IRS define an investment property? The IRS views a property as an investment property when it’s primarily used to generate a profit. You’re usually required to report all forms of rental income to the IRS, but it may be treated differently depending on whether or how frequently you use the rented property for your own personal use. If you’re unsure about how your rental activities should be dealt with, consult a tax professional.
In this article, residential investment home types include:
- Condominiums
- Duplexes
- Manufactured homes
- Multifamily homes
- Cooperatives
Types of loans for an investment property
| Loan program | Description | Number of units allowed |
|---|---|---|
| Conventional loans | This is the most common way to buy an investment property with no occupancy requirement. |
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| Debt service coverage ratio (DSCR) loans, no-doc loans or other nonqualified (non-QM) loans | You can qualify based solely on the rent you stand to collect, or using other alternative measures of income or assets. In some cases, you can even get by with no verification of income or assets at all. |
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| Federal Housing Administration (FHA) loans | You can buy a multi-unit property and collect rent on the other units. In most cases, you’ll use a traditional FHA loan, which requires that you live in one of the units for at least 12 months. |
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| U.S. Department of Veterans Affairs (VA) loans | This VA multifamily loan program is exclusively for eligible military borrowers. It allows them to buy a property with up to seven units, as long as they live in one of the units. |
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| Owner financing | Sometimes sellers are willing to act as your lender. Owner financing arrangements often include a balloon payment, which means you’re required to pay off the entire loan balance within a short period, usually three to seven years. |
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Learn more about investment property loan rates today.
Other ways to finance an investment property
| Loan program | What it is | How it works |
|---|---|---|
| Home equity loan or home equity line of credit (HELOC) | If you currently own a home, you can borrow against a portion of your equity and leave your current mortgage loan in place. A home equity loan is paid out in a lump sum with a fixed rate, while a HELOC works more like a credit card that you can use and pay off for a set time. | Using home equity to buy an investment property usually means converting some home equity into cash and using that cash to make a large down payment toward an investment property purchase. |
| Cash-out refinance | A cash-out refinance allows you to take out a mortgage for more than you owe and pocket the difference in cash. | As with home equity loans and HELOCs, you’ll typically borrow against your home equity to come up with a down payment on the investment property. |
| Hard money loan | Hard money investors are private parties or businesses (not banks) willing to lend you money as long as you agree to pay it back quickly — typically in one to five years. The loan is secured by a physical asset (usually the investment property), and therefore, little to no emphasis is placed on your credit history. | House flippers who need to bridge a short gap — usually between a property’s purchase and refinance or sale — often use hard money loans. This type of financing is typically the most expensive and most short-term option available. |
How to decide which type of loan is best for your investment property
Conventional loan
When it’s the best choice:
- You don’t want to live at the property
- You have a strong credit profile and well-documented income
- You can put down 15% to 25%
DSCR or other non-QM loan
When it’s the best choice:
- You need a loan that won’t require relying on your income or credit information
- You don’t have plans to live at the property yourself
- You can afford a large down payment (at least 20% to 30%)
- You have experience as a landlord
FHA loan (owner-occupied)
When it’s the best choice:
- You don’t mind occupying one of the units for at least 12 months
- You want to make a relatively small down payment
- You’re looking for a property with no more than four units
FHA loan (multifamily)
When it’s the best choice:
- You need financing for a property with five or more units
- The property doesn’t require substantial repairs
VA loan
When it’s the best choice:
- You’re a service member, veteran or military family member with a qualifying certificate of eligibility (COE)
- You want the option to put 0% down
VA “joint” loan
When it’s the best choice:
- You’re ready to become co-borrowers with someone, and at least one of you plans to use your VA loan entitlement
- You want a property with up to six residential units
Owner-financed loan
When it’s the best choice:
- You like the idea of keeping the financing between you and the seller, rather than involving a third party
- You’re confident you can fully repay the loan within five to 10 years
Home equity loan or HELOC
When it’s the best choice:
- You own a home and have built significant equity in it
- You don’t want to replace your home loan with a new one
- You’re comfortable carrying three mortgages at once (your primary mortgage, the home equity loan or HELOC and the investment property loan)
Cash-out refinance
When it’s the best choice:
- You own a home with significant equity
- You can benefit from replacing your current home loan
Hard money loan
When it’s the best choice:
- You’re looking for a short-term solution
- You don’t want to drain your home’s equity
- You don’t mind that it’s a more expensive loan compared to the other available options
Minimum requirements for investment property loans
How to get an investment property loan
The mortgage process for getting an investment loan requires a few extra steps.
- Shop around for an investment property mortgage lender. Most lenders offer some type of investment property loan option, but the rates may vary significantly between companies. Not all lenders offer non-QM loans, so you may have to make some extra calls if you need one. Hard money lenders are often private individuals or partnerships — ask your real estate agent or other real estate investors for recommendations.
- Fill out a loan application. If you’re applying for a standard loan program (like a conventional, FHA or VA loan), the process is similar to any other loan type. However, non-QM lenders and hard money lenders may have their own processes or application systems.
- Provide extra asset documentation. You may need to show bank statements and current leases or rental information on the property you’re purchasing. Lenders typically permit you to use a percentage of your retirement or 401(k) vesting toward your reserve requirement, so have a current statement handy.
- Pay for an appraisal. The home appraisal process requires an extra report detailing the average rent collected on similar homes in the area. In some cases, the rental income from this report can be used to help you qualify for the loan.
- Review your closing disclosure. The lender will issue a closing disclosure three business days before closing. Review it to make sure all the figures are what you expected. If you’re taking out a hard money loan, make sure you understand any prepayment penalties or “guaranteed interest” language. Hard money lenders typically want to make a set amount of interest, regardless of how quickly you pay back the loan.
- Gather your funds and close. You’ll send a wire or bring a cashier’s check for your closing funds. Once the mortgage closing paperwork is signed, your loan funds are sent, and the property is recorded in your name.
Appraisal fees are more expensive due to the extra work involved to estimate both the property value and the average rent value. If you need a multifamily home appraisal, expect to pay more, since each unit must be inspected and valued.
Investment property mortgage rates
Investment property mortgage rates are generally higher than you’d pay for a primary residence, to cover the extra risk that you might default.
Your credit score and down payment also substantially impact the rate you’re offered. In fact, lower-credit-score borrowers may have to purchase mortgage points to get an investment property loan.
Compare investment property loan rates today.
Frequently asked questions
You can own as many properties as you can afford. However, you’re capped at 10 properties through conventional mortgage lending.
A document called an occupancy affidavit certifies whether a borrower intends to use the property as a primary residence or a rental property.
Take time to improve your credit score and make the largest down payment you can. These factors will help give you the best chance of a low investment property rate.
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