The right rental financing strategy can make or break your real estate investments. If you’re unable to use your own cash, raise money from friends and family, or a partnership (e.g. Joint Venture), then you should explore other financing options. This guide covers the different types of rental property loans for real estate investors to help you get a handle on how to finance an investment property.
Pro Tip from Experienced Landlord
- For beginners (own 0-1 units): When I started out, I saved my own capital, partnered with another person 50/50, and then formed an LLC. From there I spoke to 20+ lenders to figure out which one would work best for my real estate strategy. I suggest you do something similar to increase your knowledge about lending but also find the best fit lender. You can get started by speaking with our hand selected lending partners. Click here to learn more.
- For Experienced real estate investors (owner 3-4+ units): Baselane has evaluated countless lenders and brought you a select few lenders that we believe can help you scale your rental business. We encourage you to speak to our Lending partners to see if it works for your strategy. Click here to learn more.
| Loan Type | Best For | Pros | Cons |
|---|---|---|---|
| Conventional Loans | Owner-occupied rentals or investors with ≤10 units | Low mortgage interest rates, flexible terms | Strict eligibility requirements, limited loan options, often requires 20% down payment |
| Private Loans | Private Loans Short-term loan to purchase or refinance rental properties | Quick approval, based on property cash flow or your personal income, negotiable loan terms | Higher interest rates, property liens to secure debt |
| Portfolio Loans | When conventional loan options aren’t feasible | Easier qualification criteria, quick closing times | Higher interest rates, origination fees |
| Home Equity Loans | Financing rental properties with existing home equity | Flexible repayment terms, good source for down payments | Long application process, can impact DTI (debt-to-income) ratio |
| FHA Loans | Purchasing a primary residence for a rental property | Lower down payment and credit score requirements | Must be primary residence for at least 12 months |
| VA Loans | Service members, veterans, eligible spouses | Zero percent down Comeptitve rates | One unit must be owner-occupied, not for individual rental units or investment land |
| Friends and Family Loans | Flexible loan terms and interest payments | Below market interest rates, flexible repayment schedule | Can strain relationships, doesn’t build credit score |
7 Ways to Finance a Rental Property
There’s a range of methods for financing single-family or multi-family homes and other residential investment properties. These are some of the most common types of loans for real estate investing.
Conventional financing options are traditional loans backed by government-sponsored enterprises (GSEs) that purchase and guarantee mortgages from banks and credit unions. They provide fixed and adjustable-rate mortgage loans for 15, 20, or 30 years.
Best for: Purchasing a primary residence, second home, or real estate investment property for short-term or long-term rental properties.
Conditions:
- Credit score of 620 or above
- Required down payment of 3% or more (FHA Loan can go as low as 3% down, but has PMI)
- Cash reserves for 2-6 months of mortgage payments
- Debt-to-income ratio of 36% or less
Pros:
- Flexible loan terms (from $750,000 to $7.5 million)
- Low initial down payment
- Low-interest rates
- Borrowers can lock in interest rates for 60 to 120 days.
Cons:
- Private mortgage insurance (PMI) required for a down payment under 20%
- Limits financing options for purchasing a secondary income property
- Strict borrowing limits and debt service coverage ratios (DSCR)
- Can only borrow on your personal name, not an LLC or business
Private money loans, sometimes referred to as hard money loans these days, are short-term rental property loans funded by companies or investment groups rather than local community banks or mortgage brokers. Private money lenders issue loans to purchase or refinance an investment property for resale or rental income.
Best for: Rental property financing for larger projects that require substantial capital.
Conditions:
- Down payments range between 25-30%
- Bridge loan – Short terms (typically 6-12 months)
- Longer terms loans range from 10 years – 30 years and offer fixed and variable rates
- Approval is based on deal profitability and rental property value
Pros:
- Flexible terms for monthly payments or lump sum
- Less strict borrow qualification guidelines
- Financing options for distressed properties
- Quick rental property financing approval
- Multiple types of properties are eligible (single-family home, multi-family property, apartment complex, and more)
Cons:
- Higher interest rates to offset risks (generally 100-125 basis points higher than conventional loans
- Higher closing costs and fees (1-2 points charge to issue loan, charge $1-2k for legal fees, etc.)
- Higher risk for borrower and private lender
- Short loan terms require fast property sale or refinancing
- Lenders can secure this type of loan with a property lien for missing payments
3. Home Equity Loans
Home equity loan options (also called a second mortgage) borrow against existing equity in a primary residence or rental property. Equity is the property value minus the remaining mortgage balance.
Best for: Real estate investors with equity in other rental properties or a primary residence.
Conditions:
- Minimum home equity of 15-20%
- Credit score of 680 or higher
- Debt-to-income ratio of 43% or less
- 20% average down payment
Pros:
- Fixed interest rates
- Predictable monthly payments
- Long repayment schedule (up to 30 years)
- Potential tax deductions on interest
- Can borrow up to 80% of home equity
Cons:
- Closing costs are 2%-5% of the loan
- Loan applications can take several weeks
- Lenders can seize your home for defaulting on loan payments
- Repayments can count against DTI ratio for other loans
- Monthly payments are often interest-only at first
- May require doing another appraisal (extra costs and takes longer)
4. FHA Loans
FHA loan options are government-backed mortgages insured by the Federal Housing Administration. Certain rules and regulations apply when using FHA loans to finance rental properties.
Best for: Purchasing a primary residence with up to 4 units to use as a rental property after one year.
Conditions:
- Credit score of 500-580 or higher
- Down payment as low as 3%
- Loan-to-value ratio of 96.5% or less
- Must pass an FHA appraisal
Pros:
- Accepts gift funds for down payments
- Low credit scores are eligible
- Competitive fixed interest rates
- Lower DTI ratio requirements
- Includes non-occupant co-borrowers income
Cons:
- Requires upfront and annual mortgage insurance premiums
- Borrower must live in the rental property under contract for one year
- Limits on the number of real estate investment properties
- Rental property must meet health and safety standards
- Higher borrowing limits are only available in certain counties
5. VA Loans
Veterans Affairs (VA) loan options are available for active-duty service members, eligible spouses, and veterans. One unit must be owner-occupied to qualify for VA rental property financing.
Best for: Real estate financing option for Military Veterans for a multifamily property with 2-4 units.
Conditions:
Borrowers must meet one of the following conditions.
- 90 consecutive days of active service during wartime
- 181 days of active service during peacetime
- Six years in the Reserves or National Guard
- Spouse of a service member died in the line of duty or due to a service-related injury
- The property must be in the state you live in (where your address is registered)
Pros:
- 0% down payment and no minimum credit score
- No mortgage insurance premium
- Private mortgage insurance isn’t required
- No early payment penalties
- Can refinance up to 90% of the home value
Cons:
- Property owner must live in a rental unit
- Can’t buy land or a single-unit home for renting
- VA borrowers pay funding fee of 1.25-3.3%
- Restrictions on income property options
- Can’t waive home inspections or appraisals for sellers
6. Portfolio Loans
Portfolio loan options remain with the originating lender rather than being sold on the secondary market like most traditional mortgage loans. As a result, lenders can set portfolio loan standards, limits, and approval requirements.
Best for: Rental property investors who don’t qualify for a conventional mortgage loan.
Conditions:
- Credit score can be below 620
- Debt-to-income ratio below 45%
- Down payments range from 3-25%
- Financing multiple real estate properties
Pros:
- No capital limits or restricted types of properties
- Consolidate multiple mortgage payments
- Easier qualification criteria compared to conventional loans
- Possible approval with higher DTI and lower credit scores
- Lenders may weigh more rental income for qualification
Cons:
- Higher interest rates than conventional mortgage loans
- Potential for prepayment penalties
- Higher origination fees for loan applications (up to 2%)
- Large balloon payments at the end of the loan term
- Not offered by every loan program
7. Friends and Family Loans
Personal loans involve borrowing money from friends and family. These alternative financing options often prioritize trust over strict loan terms.
Best for: Investment property projects that may not be attractive to traditional lenders but could yield good returns.
Conditions:
- Fixed Interest Loan: Agree to pay a rental property loan back with interest.
- Sharing Equity: Offer a stake in the rental property instead of repaying with interest. E.g. 50/50 split of the profits if they fund the entire deal
- Partnership or Joint Venture:
- Option A: Provide sweat equity and manage the property in exchange for your family member providing all the financing
- Option B: Split the work and the financing 50/50. Both parties put in 50% of the cash required and split up the operational responsibilities.
Pros:
- Easier approval due to familiarity
- Flexible repayment schedules (you negotiate that with your family member)
- Lower interest rates compared to bank loans
- Potential returns on investment for friends and family
- Emotional support and understanding
Cons:
- Informal agreements can result in legal issues
- Loans and gifts have different tax implications
- Mixing finances and personal connections can strain relationships
- Potential financial risks for lenders
- Dependence on the lender’s financial resources and stability
Other rental property financing options include hard money loans, commercial real estate loans, and more.
Final Thoughts
Financing an investment property can be a simple process. For creating a successful investment strategy and increasing rental income, it’s crucial to grasp the pros and cons of each loan option.
Baselane offers flexible real estate financing for rental properties. Our investment property loans range from $55K to $2M and can be closed within 10 business days.
