Income-producing properties, such as small apartment buildings, duplexes, single-family homes or condominiums that are rented out to tenants, can be great investments.
There are different requirements to secure a loan on an investment property versus obtaining a mortgage for your own residence. In general, lenders have more rules in their underwriting of investment properties and require more money down. Plan on having a higher interest rate and increased appraisal fee.
You will need to put down at least 20% of the purchase price if you’re buying an investment property. If you’re willing to put down more money, you may secure a lower interest rate. In addition to the investment property down payment, lenders will require you to have six months of cash reserves available per property.
Certain property types — such as time-shares, co-ops, some manufactured homes, and bed and breakfasts — may not be available for mortgage or home equity financing.
Investment property financing is often based more on the value of the property than on you as a borrower. If your credit score isn’t perfect, you’ll still have options; they’ll just cost you more.
Some investment property financing options include:
Conventional Bank Loans – You’re probably familiar with conventional financing through the purchase of your home. With a conventional loan, your personal credit score and credit history are key. Lenders also look at your income and assets, and you must be able to afford your existing mortgage (if you have one) plus the monthly loan payments on the investment property. (Debt-to-income calculations do not include future rental income.) With a conventional mortgage for an investment property, the lender will require a large down payment, typically 25%.
Fix-and-Flip Loans – If you’re looking to renovate a property in order to sell it instead of using it to produce long-term income, this type of loan may be a good option. A fix-and-flip loan is a short-term loan that allows you to complete renovations, so the home can be put back on the market as quickly as possible. The primary focus for the lender is on the property’s profitability, not just credit and income, and the home’s estimated after-repair value (ARV) is used to gauge whether you’ll be able to repay the loan. Because of this, it may be easier to qualify for this type of loan instead of a conventional loan, and funding may be faster than with a conventional mortgage closing. Interest rates for this kind of loan are usually higher, however, and you may have a short timeframe for paying it back.
Home Equity Loans – You can use the equity you’ve built up on your home (up to 80% on your primary residence) to secure an investment property for long-term rental or to finance a flip. Equity loans of up to 75% on second homes and investment properties are also available.
Finding the money to take advantage of an investment opportunity doesn’t have to be an obstacle.