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Financial Goals

10 Investment Property Loans and Financing Alternatives

9 min read
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picture of author, Hometap TeamBy Hometap Team on June 30, 2021

In a healthy housing market, investing in real estate can be a great decision if you’re looking to make some extra money. Not only is it a potentially lucrative source of passive income, but it also allows you to retain ownership of a property that may appreciate in the future. However, it’s wise to do your homework before investing in a property to avoid losing money. Below, we’ll cover different types of loans for financing investment properties, rental properties, and second homes so that you know what to look for in a property and a financing solution.

Perhaps the most important thing to remember is that if you’re looking for quick cash, an investment property might not be your best bet; it can take years to see a positive return on your investment. Plus, if you don’t plan on maintaining the property yourself (experts also recommend setting aside 10–15% of the tenants’ annual rent amount for upkeep), you’ll also need to consider the costs of outsourcing property management, which ranges from $80–$100 on average per month. That’s in addition to your down payment and interest, property taxes, insurance, and utilities if you’re covering them for the tenant.

For a $100,000 rental property, for example, you may need $30,000 or more just to close on the property and make necessary repairs before renting it out. A simple and common way to evaluate a potential rental property is known as the “one percent rule.” This states that if the gross monthly rent — prior to expenses — earned from the property is equivalent to at least one percent of the purchase price, it’s an opportunity worth exploring. 

Fortunately, if you’re wondering how to finance get a loan for an investment property, you have options. The following are some of the best loans forptions for financing investment properties.

Types of Investment Property Loans

Conventional Bank Loans

While the specifics depend on the lender, standard loans can certainly be used as a rental property loan. There are some advantages that typically go hand in hand with using a conventional loan for an investment property, like low interest rates and costs. Traditional lenders also allow you to take out multiple mortgages, though most have a limit. However, there’s typically fairly high down payment requirements of at least 15-25% for investment properties, and your personal credit history and score factor into your ability to get approved for the loan.

FHA Multi-unit Financing

FHA loans for investment properties are backed by the Federal Housing Administration and can be used for new construction, purchases, and gut rehabs of existing properties. Unlike traditional loans, this financing option may only require a 3.5% down payment and may be a possibility for potential owners with a lower credit score than needed for a traditional loan. The catch? To qualify for an FHA loan for an investment property, you are required to reside in one of the units for at least a year.

VA Multi-unit Financing

If you’re an active-duty service member, veteran, or spouse, you may qualify for a VA loan for an investment property. It’s offered through both mortgage brokers and conventional lenders, and has no down payment, mortgage insurance, or firm credit score requirement. Like the FHA loan, you must reside in one of them to be eligible and may be required to have cash reserves to cover several months of expenses.

Portfolio Loans

Portfolio loans are mortgages that are not intended to be sold on the secondary market. They are offered by private lenders, who may be community banks or credit unions, or mortgage brokers. They may be attractive due to their flexibility on term, down payment, and length, and interest rate along with their relatively lenient requirements. On the other hand, this lenient criteria often means that borrowers may have to stomach higher interest rates, higher fees, prepayment penalties, and even balloon payments; this means that you’ll be stuck paying the full balance at the end of the short-term loan.

LLC Loans

You may have heard of an LLC loan for an investment property, but it’s a bit different from other options, since it’s technically a loan to the LLC and not to you personally. Many real estate investors finance rental properties under an LLC in order to limit personal liability, establish business credit, and increase protection from lawsuits or disputes. While the process is fairly straightforward — complete the easy steps to set up an LLC, and apply for a mortgage — you will first need to establish credit history for lenders to evaluate, which can be time consuming if you’re hoping to finance an investment property quickly.

“Fix and Flip” Loans

Also known as a “hard money” loan, these specialized fix-and-flip loans typically come with short terms (a few years or less), interest rates that average 10–15%, and points. One advantage is that there aren’t as many restrictions or hurdles to deal with as traditional loans; lenders also may determine the amount you can borrow by looking at the home’s after-repaired value.

Frequently Asked Questions About Investment Property Loans

Can I get a home equity loan on an investment property?

Yes, you can. While you’ll be paying interest on the loan, the rates are usually fixed — and often lower than a traditional personal loan.

Is it smart to use a HELOC for investment property?

While the right home financing solution for you depends on your own situation and goals, a home equity line of credit (HELOC) can be a good choice if you’re looking for flexibility in terms of how much money you can access and how often. However, the variable rate can present challenges if you’re seeking a predictable monthly payment.

How much can I borrow against my investment property?

The amount you can borrow against your investment property varies by lender, but a typical maximum is about 80% of your home’s value.

Can you have a HELOC on a rental property?

Yes, you can. This solution has the advantage of allowing you to borrow against your investment or rental property and pulling out cash as you need it.

Can you cash out on equity from an investment property?

Yes, you can, and the process works the same as a cash-out refinance on your primary residence. Like a refi on your own home, you may be able to lock in a lower interest rate on your investment property’s mortgage as well.

Learn how the BRRRR method of real estate investing uses refinancing to fund properties >>

Alternative Rental Property Financing

Home Equity Loan

A home equity loan allows you to tap into your equity to fund an investment property, and has the advantage of a fixed interest rate that is usually lower than that of a personal loan. By using a home equity loan for a second home, you’re essentially taking out a second mortgage, so it will have established, predictable rules for paying it back at the end of the term.

Cash-out refinance

A cash-out refinance of your current mortgage may give you the opportunity to fund an investment property and simultaneously secure a lower interest rate on your mortgage. Depending on the length of the mortgage you choose, however, you’re also possibly lengthening your payoff timeline. You’re also still stuck with a lengthy application and approval process and closing, origination, and possibly even appraisal fees.

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With a home equity line of credit (HELOC), you get flexibility when it comes to accessing funds, tax benefits, and the chance to improve your credit score. But it, too, has disadvantages, including unpredictable monthly payments due to the variability in interest rates. You also run the risk of your lender freezing your HELOC if your credit score or home value declines.

Home Equity Investments
Have you ever considered using the equity in your home to buy an investment property? Unlike a loan, a home equity investment from Hometap doesn’t come with any interest or monthly payments. You’ll need to settle the Investment within 10 years, through a refinance, buyout with savings, or sale of your home.

If you’re in the market for a rental property loan or financing alternative for a second home, start by determining what your funding needs are and what you might qualify for. Then start running the numbers to find the loan or investment solution that works for you.

Take our five-minute quiz to see if a Hometap Investment might be a good investment property loan alternative for you.

You should know

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

Hometap is made up of a collaborative team of underwriters, investment managers, financial analysts, and—most importantly—homeowners—in the home financing field that understand the challenges that come with owning a home.

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