Investing in rental property can be a powerful way to build wealth, but securing the right rental property financing is crucial. Your choice of type of loan for investment property directly impacts cash flow, returns, and overall portfolio growth. Understanding your options helps you make an informed decision that aligns with your investment goals.
Key takeaways
- Rental property loans typically require higher down payments and interest rates than owner-occupied home loans.
- Conventional, FHA, and VA loans can finance investment properties under specific conditions, like owner-occupancy for multifamily.
- DSCR loans are popular for investors with multiple properties, qualifying based on property cash flow rather than personal income.
- Private and hard money loans offer speed for fix-and-flip projects but come with higher costs.
- The best loan type depends on your financial situation, the property, and investment strategy.
How rental property loans differ from home mortgages
Financing a rental property isn’t the same as buying a home to live in. Lenders view investment properties as riskier than primary residences. This difference in risk perception leads to different loan terms.
You’ll generally face higher down payment requirements, often 20-30%. Interest rates on investment property loans are also typically higher compared to owner-occupied home loans. Qualification criteria can be stricter, sometimes focusing more heavily on cash reserves and the property’s potential income.
Exploring your rental property financing options
Real estate investors have several paths to financing their rental properties. The best choice depends on your specific circumstances, property type, and experience level. Let’s look at the common options available.
Conventional loans
Conventional loans are the most common type of mortgage used for investment properties. These are not government-backed but adhere to guidelines set by Fannie Mae and Freddie Mac. They typically require a minimum credit score of 620, although a score of 720 or higher is often needed to secure the most favorable terms and interest rates.
Expect down payment requirements of 20-25%. Lenders will also review your debt-to-income (DTI) ratio, usually preferring it to be under 36%. You’ll also need to show sufficient cash reserves.
FHA loans
FHA loans are insured by the Federal Housing Administration and are primarily designed for owner-occupied homes. However, you can use an FHA loan for investment property that is a multi-unit property (up to 4 units) if you plan to live in one of the units for a period, usually 12 months. The main draw is a lower minimum down payment, often as low as 3.5%.
This can be an attractive option for first-time investors willing to live in the property initially. Keep in mind that you must meet the owner-occupancy rule to qualify.
VA loans
Similar to FHA loans, VA loans for rental property are guaranteed by the U.S. Department of Veterans Affairs and are mainly for eligible veterans buying a primary residence. You can potentially use a VA loan for a multi-unit property (up to 4 units) if you occupy one of the units. The significant benefit is the possibility of a 0% down payment if you meet eligibility requirements.
This is a powerful option for qualified veterans looking to start their real estate investment journey. You must intend to live in one of the units.
DSCR loans
DSCR stands for Debt Service Coverage Ratio. These loans are becoming increasingly popular for investors, particularly those with multiple properties. DSCR loans qualify borrowers based on the property’s projected rental income relative to the mortgage payment, rather than scrutinizing personal income or tax returns.
This focus on property performance makes them ideal for investors whose personal income may not fully reflect their real estate holdings or who want a simpler documentation process.
They typically require a down payment of around 20-25% and are a strong option for financing properties intended for long-term or short-term rental financing, including Airbnb loans. Baselane provides investment loans, including DSCR options tailored for real estate investors.
Portfolio loans
Portfolio loans are offered by lenders who keep the loans in their portfolio rather than selling them on the secondary market like conventional loans. This allows lenders more flexibility in their underwriting criteria. They can be a good fit for investors with complex financial situations or those buying properties that don’t fit standard loan boxes. These loans are often used by investors building a diverse portfolio.
Requirements and terms vary significantly from lender to lender.
Commercial real estate loans
If you plan to purchase a property with five or more residential units, it’s typically classified as commercial real estate. This means you’ll likely need a commercial loan for rental property rather than a residential mortgage. Commercial loans usually have shorter terms than residential loans (e.g., 5-20 years) and different rate structures.
They often require higher down payments, sometimes 25-30% or more. The approval process heavily weighs the property’s income potential and your experience as an investor. Baselane offers investment loans, including commercial loan options for properties with five or more units.
Private money & hard money loans
Private money and hard money loans come from individuals or companies rather than traditional banks. They are often used for short-term financing, particularly for fix-and-flip projects. These loans prioritize the property’s value as collateral over the borrower’s creditworthiness or income.
They offer speed and flexibility, often closing in days or weeks, significantly faster than traditional options. However, they come with substantially higher interest rates and fees. These loans are best for experienced investors with a clear exit strategy.
Seller financing
Seller financing, also known as owner financing, occurs when the seller of the property acts as the lender. The buyer makes payments directly to the seller according to agreed-upon terms. This can be a flexible option, potentially requiring a lower down payment or offering a more favorable interest rate than traditional loans.
It can also facilitate a sale that might not otherwise qualify for conventional financing. Terms are negotiable between the buyer and seller.
Other options
Beyond dedicated rental property loans, investors sometimes leverage other financial tools. A Home Equity Line of Credit (HELOC) on your primary residence or another property can provide funds for a down payment or even the full purchase of an investment property. This taps into equity you’ve already built. Remember to consider the risks of using your primary residence as collateral.
How to choose the right rental property loan for you
Selecting the best loan requires evaluating your financial profile, the property’s characteristics, and your investment goals. There’s no single “best” loan; the optimal choice is personal. Here’s a framework to help you decide how to get a loan for a rental property.
Assess your financial situation
Start by honestly evaluating your credit score, available cash reserves, and DTI. A higher credit score, ideally 720 or above, will unlock better terms and rates for rental property. The more cash you have for a down payment, the more options become available and the less you’ll need to borrow.
A lower DTI indicates less existing debt and signals lower risk to lenders.
Consider the property type and investment strategy
The type of property (single-family, duplex, five-unit apartment) dictates certain loan options, like commercial loans for 5+ units. Your strategy also matters: a fix-and-flip project might require the speed of a hard money loan, while a long-term rental benefits from the stability of a conventional loan. Properties intended for short-term rental financing, like Airbnb loans, might favor DSCR or portfolio loans due to their focus on property cash flow.
Understanding your specific property and how you plan to generate income is key. Consider specific market conditions, like those for investment property loans in Florida.
Analyze potential cash flow
For income-generating properties, especially with DSCR loans, analyzing potential cash flow is critical. Will the property generate enough rent to cover expenses, including the mortgage payment? The “2% rule,” which suggests monthly rent should be 2% or more of the purchase price, is a simple guideline some investors use for a quick check.
Lenders offering DSCR loans will perform a more detailed analysis of projected income versus debt obligations. Tools like Baselane’s banking and bookkeeping features can help you track potential income and expenses for properties you’re considering, providing real-time insights into potential profitability.
Shop around and compare offers
Don’t settle for the first loan offer you receive. Different lenders, including traditional banks, credit unions, and specialized investment property lenders (like those offering DSCR loans through Baselane), will offer varying terms and rates. Compare interest rates, fees, points, loan terms, and closing costs carefully.
Getting quotes from multiple sources ensures you find the most competitive financing for your situation.
Tips for securing the best rental property loan terms
Getting the best possible terms on your rental property loan can significantly improve your investment’s profitability. Here are some strategies to help you qualify and secure favorable terms.
- Improve your credit score: Aim for a credit score of 720 or higher. This demonstrates financial responsibility and significantly increases your chances of getting the lowest interest rates and better terms.
- Increase your down payment: Putting down more than the minimum required reduces the lender’s risk and can result in a lower interest rate. A 25% down payment is often standard for conventional investment loans.
- Reduce your DTI: Lowering your debt load relative to your income makes you a less risky borrower. Pay down credit card balances or other loans before applying.
- Gather documentation efficiently: Be prepared with all necessary financial documents, including tax returns, bank statements, and proof of income or reserves. Being organized can speed up the application process.
- Work with an experienced lender: Lenders specializing in rental property loans understand the nuances of investment financing. They may have more flexible products or be better equipped to handle complex investor profiles.
A comparison of key rental property loan types
Here is a comparison of the most common types of rental property loans.
| Feature | Conventional Loan | FHA Loan (for multifamily) | VA Loan (for multifamily) | DSCR Loan | Portfolio Loan | Commercial Real Estate Loan (5+ units) | Private/Hard Money Loan | Seller Financing | Baselane (Investment Loans) |
|---|---|---|---|---|---|---|---|---|---|
| Minimum Down Payment | 20-25% | 3.5% (if owner-occupied) | 0% (if eligible & owner-occupied) | Typically 20-25% | Varies (often 20%+) | 25-30%+ | Varies (often 10-25%) | Negotiable | Varies (Competitive for investors) |
| Minimum Credit Score | 620+ (higher for better terms) | Lower threshold (<620 possible) | Varies (often requires good credit) | Varies by lender | Varies by lender | Typically 660+ | Flexible / Asset-based | Flexible | Investor-friendly / Property-focused |
| Owner-Occupancy Req. | No | Yes (for 1 year, in one unit) | Yes (eligible veteran in one unit) | No | Varies | No | No | No | No |
| Speed | Standard (weeks to months) | Standard (weeks to months) | Standard (weeks to months) | Often Faster | Varies by lender | Can be lengthy | Often Fastest (days to weeks) | Negotiable / Potentially Fast | Often Faster than traditional banks |
| Ideal Use aseC | Experienced investors, lower rates | First-time investors (owner-occupiers) | Eligible veterans (owner-occupy) | Investors with multiple properties, a cash flow focus | Investors with diverse portfolios, specific needs | Larger multifamily, commercial properties | Quick turnaround, distressed properties | Flexible situations, non-traditional buyers | Modern investors seeking efficient, tailored financing solutions |
Bottom line
Choosing the right rental property financing is a cornerstone of successful real estate investing. By understanding the different loan types and how they align with your investment goals, you can secure funding that supports profitability and growth.
Once you have your property, managing its finances efficiently is just as critical. Baselane helps investors streamline property finances with tools for banking, bookkeeping, and rent collection. This makes tracking income, expenses, and overall performance straightforward. Sign up today.
FAQs
An investment property loan doesn't have one single name; it depends on the specific type of financing used. It could be a conventional investment property loan, a commercial real estate loan, a DSCR loan, or another type, depending on the property and borrower.
The 2% rule is a guideline suggesting that the monthly rent of an investment property should equal or exceed 2% of its purchase price to potentially be a good investment. For example, a $200,000 property should rent for $4,000 per month or more.
While minimum credit score requirements vary by loan type and lender, generally, you'll need at least a 620 for conventional loans. A credit score of 720 or higher is often necessary to qualify for the most favorable interest rates and terms.
Yes, it is generally harder to get a loan for a rental property compared to a primary residence. Lenders typically require higher credit scores, larger down payments (20-30%), and have stricter qualification criteria due to the increased risk associated with investment properties.
