The Complete Guide to Investment Property Loans

Investing in additional real estate or investment property is not the same as buying a home. There are different loan types and interest rates that come with investment property loans. Here’s the complete guide to investment property loans to help you make a solid and profitable investment:

Why Should You Invest in Property?

It seems like everyone is investing in real estate these days. But is the investment worth the hassle? While there’s no easy answer to this question, here are some reasons why you should invest in real estate:

Real estate is constantly appreciating in value. Of course, appreciation is never 100% guaranteed. But if you make smart investment decisions and buy in a good area, you can generally expect to see a positive rate of return on your investment.
Real estate offers a predictable cash flow. People are always looking for places to live and work. When you invest in real estate, you can provide these spaces, charge rent, and make a profit at the end of the day.
Real estate provides you with equity. You can then use this equity to purchase other investment properties or utilize the BRRRR investing method to make a lucrative profit in real estate investing.
Real estate can be improved upon. You can buy run-down properties and fix them up before selling them for a good profit.

What Different Types of Properties Should You Invest In?

Based on these amazing benefits, if you want to move forward with real estate investing, you need to know about the different types of properties you can invest in. Specifically, you can invest in residential properties, commercial properties, and land. Let’s dive deeper into each of these different types so that you can choose the right one for your investment capabilities and goals:

Residential Real Estate

The first type of property you can invest in is residential. This includes single-family homes, townhomes, or condos. Residential real estate investors can then rent their properties out to individuals. Rental property is a great real estate investment. Buying a residential property usually requires a down payment, and they are especially high for a multi-unit property. Although residential leases come with shorter terms than commercial or land leases, they can still be lucrative if done correctly.

Commercial Real Estate

The second type of property you can invest in is commercial. However, there are several different categories to consider within commercial real estate, including office, retail, multi-family, and industrial.

Office real estate involves office buildings and parks, whereas retail real estate involves shopping plazas and shopping malls. On the other hand, multi-family real estate involves properties like condominiums or apartment buildings with more than four separate units. Finally, industrial real estate involves property like warehouses, manufacturing plants, and laboratories.

Commercial real estate loans don't always come with higher interest rates--but mortgage interest on commercial properties is generally higher than that of residential.

Land

The third and final type of property you can invest in is land. You can either buy raw land or semi-developed land, depending on your investment options. You can acquire land in emerging areas and hold for longer periods until either zoning changes or values increase; this practice is known as land banking.

You can also acquire a large lot and subdivide it for expanded development known as parceling.

Land can typically be bought at lower costs but is still valuable when it’s leased out. With that said, this is a unique area of investing best left to experienced professionals.

What Are the Different Ways to Invest in Property?

Just as there are different investment properties, there are also different ways to invest in them. Here are some of the different ways that you can invest in property based on how much time, money, and effort you’re willing to put into the investment:

1. Buy-and-Hold: Long-Term Leasing

Whether you’re investing in commercial or residential property, you can use the buy-and-hold strategy for long-term leasing. In this strategy, you maintain the property for an extended period, during which you rent it out to qualified tenants to collect income. If you don’t want to be a landlord, a property management company can do all the dirty work for you — for a price.

Perhaps the biggest downside of implementing a long-term leasing strategy is dealing with tenant turnover and vacancies. For that reason, it’s important to find good tenants and do your best to keep them. Many beginning investors underestimate the value of a good tenant and don’t prioritize keeping them.

2. Buy-and-Hold: Short-Term Vacation Rentals

If you’re interested in residential properties but aren’t thrilled by the idea of a long-term lease, you can try the short-term strategy instead. In this strategy, you rent out your residential property as essentially a vacation rental on a short-term basis. Platforms like Airbnb and VRBO have made this investing strategy particularly lucrative these days.

Although you can usually charge more for short-term rentals, the upkeep costs are going to be higher. For instance, you have to clean the unit after every guest. You may also deal with more frequent damage and replacements since your guests aren’t staying at the property long-term.

3. House Hacking

House hacking involves letting other people pay your mortgage for you! While this may seem too good to be true, it’s possible when you purchase the right kind of multifamily property. In many cases, investors buy small multifamily properties that have anywhere from two to four units.

The investor then lives in one of the units while renting out the others. They then use the proceeds from the rental units to pay the mortgage, utilities, maintenance, etc. Essentially, you get to live for free at the cost of being a landlord to your neighbors.

4. House Flipping

Thanks to HGTV, everyone knows about house flipping. House flipping involves purchasing a run-down residential property, repairing it, and renting it out or selling it for a profit. While this may seem easy in theory, it’s quite risky if you don’t know what you’re doing.

Often for house flipping to be profitable, you will need to purchase very questionable properties that may end up requiring tens of thousands of dollars in repairs. These costs can add up quickly and can end up putting you in the red on your investment if you’re not too careful.

5. Wholesaling

Wholesaling is a unique investment opportunity that requires a lot of skill and experience. Real estate wholesalers work hard to find great real estate deals, purchase properties at a low cost, and immediately sell the rights to other investors at a higher price. And on the plus side, wholesalers don’t have to deal with the inconveniences of being a landlord or the intricacies and risks of a flip.

How to Finance Your Investment Property

Once you have found the perfect investment property, you need to finance it. There are several different ways to finance an investment property, including owner financing, cash, conventional loans, hard money loans, private money loans, bridge loans, commercial real estate loans, and home equity loans. Let’s explore each loan type in greater detail so that you can make the best decision for your investment:

1. Cash

If possible, the best way to finance an investment property is to use cash. Using cash allows you to bypass using a lender that may have all sorts of different requirements, applications, and interest rates. However, it’s not always possible for investors to use cash, especially for high-value investments within the commercial realm.

Even if investors have cash available, it’s often wise to utilize leverage to multiply their returns instead of paying up front. If the debt cost is less than the expected return—for example, earning 9% annually with a 6% interest rate—borrowers will come out ahead financing an investment property.

2. Conventional Loan

If you find yourself needing a loan for your investment property, you may want to consider a conventional loan. A conventional loan is likely similar to the type of loan you would receive for a primary residence. If you are purchasing a residential property, then you can use a conventional residential loan. On the other hand, you can use a conventional commercial loan if you purchase a commercial property.

Conventional loans typically come with relatively low interest rates and higher loan limits. Conventional loans also offer more flexibility than government-issued loans because they aren’t beholden to agency guidelines. It may be easier to find conventional loans with adjustable term lengths or payment options for individuals who do not meet conforming or government-issued loan requirements.

Because the government does not insure conventional loans, a lender will likely ask for a higher down payment and require a higher minimum credit score to minimize their risk. However, if you can qualify for a conventional loan, it may be the loan option with the lowest fees and interest rates.

3. Hard Money Loan

If you’re looking for something quicker and more flexible than a conventional loan, there are also hard money loans. Hard money loans don’t have very strict requirements and don’t come with an in-depth application and approval process so that you can get your money quickly. However, the speed and flexibility offered by hard money loans will cost you in terms of interest.

This is because hard money lenders know they can get their money back by repossessing the property and selling it. As a result, they aren’t particularly concerned with guaranteeing the financial security of the borrower to ensure that they can make the agreed-upon payments.

4. Private Money Loan

One type of financing that many investors don’t know about is a private money loan. A private money loan involves borrowing money from a private entity — a family member, friend, or even an “angel investor.” Since you’re borrowing from a private entity rather than a corporation, you can better negotiate the terms of your loan.

5. Bridge Loan

Another type of financing that many investors don’t know about is a bridge loan. A bridge loan is a temporary financing solution that provides you with the money you need to make a competitive offer on an investment property and get to closing without having to worry about the lengthy application and approval processes.

Typically, bridge loans come with terms of up to one year, but they can be extended up to 36 months. From there, the bridge loan is paid off with the permanent financing — plus any remaining closing costs and accrued interest.

6. Home Equity Loan

Finally, there are home equity loans. Many people think that they can only use home equity loans to improve their existing homes, but they’re more flexible than that. If you’re a homeowner with more than 20% equity in your home, lenders will typically let you borrow up to 80% of your equity to use as you wish.

In this case, you can use your home equity to finance the purchase of an investment property. Since you’re borrowing against your home equity, these loans typically come with more favorable terms than other types of loans. At the same time, you must be comfortable with risking your primary residence should your investment fail and you’re unable to make your loan payments.

What Are the Interest Rates for Investment Loans?

As an investor, you’re concerned with making money. Interest rates can make or break your investment, so you need to know how much you can expect to pay in interest for each of these different loan options. Here’s a quick rundown to give you the information you need to make an informed decision:

Conventional loans: With a conventional loan for an investment property, you can generally expect to pay 0.5% to 0.75% higher in interest than you would with a traditional loan for a primary residence. For example, today’s average 30-year fixed rate for a primary residence is around 2.75%, so you can expect to pay between 3.25% to 3.5% in interest for an investment property.
Hard money loans: You can generally expect to pay high interest rates with a hard money loan for an investment property. For example, interest rates for hard money loans can range from 10% to 18%, depending on the property in question and your qualifications as a borrower.
Private money loans: With a private money loan for an investment property, the interest rate is really up to you and the lender! This lending option allows you to negotiate a favorable interest rate.
Bridge loans: With a bridge loan for an investment property, you can generally expect to pay anywhere between 6.99% to 9.99% in interest, depending on your qualifications. That being said, bridge lenders are often more flexible than other lenders and are more willing to negotiate to reach a settlement that works for both sides.
Home equity loans: With a home equity loan for an investment property, you can generally expect to pay between 3% and 12% based on your financial qualifications. As of now, the average interest rate for a 10-year home equity installment loan is 3.80%.

How to Find the Right Lender for Your Investment Property

Now it’s time to move forward in the process and find a lender that can help you finance your investment property.

Step 1: Determine What Kind of Loan You Want

Before you even begin to look for a lender, you first need to determine what kind of loan you want. This is because not all lenders offer every type of loan. Some types of loans are considered niche products and are only offered by specialized lenders.

Step 2: Search for Potential Leaders

Once you have decided what kind of loan you want, you can start searching for potential lenders. The best place to do this is online. Searching online gives you access to a whole host of information about lenders’ different products and terms.

Step 3: Vet Potential Leaders

Once you have identified a small group of potential lenders, you need to start the vetting process. You need to make sure that these lenders are reputable and have glowing customer reviews. You also need to make sure that they are trustworthy and transparent with their terms and policies. Finally, you need to make sure that they are responsive and are dedicated to customer service.

Step 4: Make Your Final Decision

Based on your findings from the previous step, you can narrow down your list of potential lenders even further to come up with a few finalists.

How To Qualify and Apply for an Investment Loan

Now that you’ve narrowed down your list of lenders, it’s time to learn about how you can qualify and apply for an investment loan.

How to Qualify for an Investment Loan?

When you’re researching different lenders, try to see if they list any qualifications on their website. From there, you can easily tell if you meet their qualifications. If they don’t have qualifications listed clearly on their website, you can reach out to them to get more information.

Although qualifications vary depending on the lender, many lenders are looking for credit scores that are at least above a 620 — although lenders prefer to see credit scores above 700. However, bridge loans and hard money lenders typically will not consider credit scores when determining loan eligibility or rates.

Additionally, lenders generally want to see that you’re able to put down at least 20% of the property’s purchase price. And finally, lenders want to see a debt-to-income (DTI) ratio below 36%. However, some lenders will allow you to incorporate the expected rental income into this calculation.

How to Apply for an Investment Loan

Once you know that you qualify for your ideal investment loan, it’s time to move forward with the application process. In most cases, the application process for an investment loan will look quite similar to that of loans for primary residences.

For starters, you will need to submit a request with information regarding the proposed property. You should also include relevant personal and contact information. From there, the lender will get back to you with the actual application.

You will be expected to provide a whole host of different documentation demonstrating your financial security and creditworthiness during the application process. The lender will also run your credit report to ensure a good credit history that doesn’t involve any defaults, liens, bankruptcies, etc.

Documents You Need When Applying for an Investment Loan

Although the exact documents required for an investment loan application vary depending on loan type and lender, here are some documents that you should expect to provide for a quick and painless application process:

One to two years of income tax returns from the IRS
One to two years of income statements like W-2s and 1099s
A few months of pay stubs
A few months of bank statements
A few months of other account statements like investment accounts and retirement accounts
Photo identification
Debt statements from debts including auto loans, student loans, mortgage loans, and credit cards

How To Receive the Best Interest Rate for Your Investment Loan

If you’re looking for the best interest rate or mortgage rate for your investment loan, here are some steps that you can take to save money and make a smart investment:

1. Shop Around With Different Lenders

Experts recommend that you shop around with three to five different lenders to compare different rates. You can then go with the lender that offers you the most favorable rate.

2. Improve Your Credit Score

To get the best interest rates, you should have a credit score above 700. To do this, you can start by paying off debts and limiting credit inquiries.

3. Put Down More Money

To lower your interest rates, you may also want to consider putting more money down. This decreases the loan amount and, in turn, the risk taken on by the lender.

4. Increase Your Cash Reserves

Finally, you can get a better interest rate by increasing your cash reserves. This also decreases your risk as the lender because you can cover your monthly payments with your reserves rather than defaulting.

The Final Rundown on Investment Property Loans

If you’re looking for quick, easy, and accessible investment property loans with favorable rates, look no further than Vaster. Vaster offers all sorts of loan products to make your investment dreams a reality. Reach out to our lending experts today for tailored lending recommendations based on your financial situation and future financial goals.

Sources:

Key Reasons to Invest in Real Estate | Investopedia

9 of the Best Ways to Invest in Real Estate | MillionAcres

How to Get a Mortgage for a Rental Property | Money Under 30