Real Estate Investing Basics

What Newbies Should Know About Financing Investment Properties (Versus Homes)

Expertise: Landlording & Rental Properties, Real Estate News & Commentary, Personal Finance, Real Estate Investing Basics
140 Articles Written

Think getting a loan for an investment property will be as easy as your home mortgage? Think again.

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Lenders are far more strict in their underwriting of investment properties and require more money down. Why? Simple: Borrowers will always default on their investment property loan before they default on their home mortgage.

With higher risk comes higher pricing, lower LTVs (loan-to-value ratios), and generally more runaround.

Here’s what new real estate investors need to know about how investment loans differ from homeowner mortgages.

Lower LTV

Plan on having to put down at least 20% of the purchase price if you’re buying an investment property.

There are exceptions, of course (most notably for house hacking, which we’ll delve into later on). By and large, however, plan on putting down 20-40% of the purchase price.

The good news is that you won’t have to worry about mortgage insurance—but that’s really the only good news.

Some conventional loan programs for investment properties allow for 80% LTV, although you should know going in that it’s a best-case scenario. You can also explore real estate crowdfunding websites, which tend to be more expensive than conventional loans, but may be more flexible.

Depending on the lender and loan program, you might also find that pricing goes down alongside LTV. In other words, if you’re willing to put down more money, you may secure a lower interest rate and lower fees.

As a final note, plan on needing at least three months’ payments as a liquid cash reserve.


Related: The Comprehensive Guide for Financing Your Very First Real Estate Deal


It will be higher. The end.

Alright, there’s a little more to know. Plan on both the interest rate being higher and the upfront lender fees being higher.

On paper, conventional lenders often quote that their investment property loans are only 0.25-0.5% more expensive than their homeowner loans. In my experience, it never turns out that way. Expect to add 1-3 percentage points more than an owner-occupied loan rate. That means that if a lender charges 4% interest for homeowner loans, you’ll likely pay 5-7% interest for investment loans.

And don’t forget points. Lenders charge up-front fees for mortgage loans, and one “point” is equal to one percent of the total loan amount. These obviously add up quickly.

It just gets more expensive from there, as you get away from conventional lenders and toward community banks or crowdfunding websites.


Credit matters, of course, although not as decisively as in homeowner lending.

If your credit score isn’t perfect, you’ll still have options; they’ll just cost you more. A score below 740 will spell higher interest rates, higher lender fees, and lower LTVs. The lower your credit score, the more you can expect to cough up at the table and in ongoing payments.

For borrowers with mediocre credit, conventional loans may not be an option.

Still, investment property financing is often based more on the collateral (the property) than you as a borrower. Remember, lenders know that investors are far more likely to default than homeowners, so they’ve already built some extra caution into the loan programs in the form of lower LTVs.

While a retail lender for homeowners asks themselves, “How likely is this borrower to default,” investment lenders also ask themselves, “Can we still recover our money if this borrower defaults?”

Limitations on Mortgages

Your options start dwindling, the more mortgages you have on your credit report.

Once you have four mortgages on your credit, many conventional lenders won’t touch you anymore. There is a program, however, introduced by Fannie Mae in 2009 to help spur investment that allows 5-10 mortgages to be on a borrower’s credit.

The program requires six months’ payments held as a liquid reserve at the time of settlement. It requires at least 25% down for single-family homes and 30% down for 2-4 unit properties. But with any late mortgage payments within the last year or any bankruptcies or foreclosures on your record, you’re persona non-grata.

There’s also a hard limit of a 720+ credit score for borrowers who already have six or more mortgages.

Own More Than 10 Properties?

Your options are limited.

Small community banks are an option because many keep their loans within their own portfolio. These are a good starting place for investors.

Commercial lenders sometimes lend “blanket” loans, secured against multiple properties. But if you go this route, be sure to ask what happens if you want to sell only one of the properties in the blanket or umbrella loan.

Seller financing is always an option if you can convince the seller to take on the headache (and risk). However, most sellers aren’t interested in becoming your bank.

Hard money lenders are great for flips but usually terrible for long-term rentals. They're simply too expensive.

Look into crowdfunding websites—new ones pop up all the time and are often unafraid of lending to investors with multiple properties.

And, of course, you can great creative. Perhaps you can get a HELOC on your primary residence? Or maybe your friends and family want to invest money toward your next rental?


House Hacking

If all this borrowing talk is starting to get tedious, why not skip investment loans altogether?

You can borrow an owner-occupied mortgage for buildings with up to four units, with cheap interest rates and low (3-5%) down payments. You can even use FHA or VA financing to do it!

The idea is you move into one of the units, with your rents from neighboring units enough to cover your mortgage. In other words, you live for free. Pretty sweet deal, eh?

Related: How I Went From $0 Net Worth to Qualifying for $1M in Real Estate Financing in 2.5 Years

After living there for a year, you can go out and do it all over again, with another four-unit building!

You also score some great hands-on experience managing rental units. If you’re looking for a little inspiration, read this case study of how one newbie house hacked a duplex.

Cash Is King

No matter your real estate investing niche, more cash gives you more options. That means stockpiling cash should become a priority for you.

The less income that you can live on, the better. Some investors even live on half their income and save and invest the rest!

Between down payments, closing costs, cash reserves, renovation budgets and more, investors always need cash and lots of it. As you buy rental properties, set aside all the profits toward your next property.

Through house hacking, you can get away with buying your first property or two with minimum cash. But that will quickly change, so make cash planning a part of your real estate investing strategy.

Here’s a prefab plan for how to make the most of your initial savings, and remember to secure your financing before you actually need it for a deal!

[Editor’s Note: We are republishing this article to help out our newer readers.]

Have any questions or concerns about financing your first few deals? What about financing deals after conventional lenders won’t touch you anymore?

Fire away. The BiggerPockets community has your back!

G. Brian Davis is a landlord, personal finance expert, and financial independence/retire early (FIRE) enthusiast whose mission is to help everyday people create enough rental income to cover their living expenses. Through his company at, he offers free rental tools such as a rental income calculator, free landlord software (including a free online rental application and tenant screening), and a free masterclasses on how to reach financial independence within 5 years.
    Hoby Miller
    Replied about 3 years ago
    I bought a home in ’04 and started renting it out in ’09. Renters trashed it in ’15. It has been vacant since as I fixed it up with the intent to sell. I am beginning to rethink selling as I am looking at capital gains, closing costs, etc. and walking away with not much. I have at least 130k in equity as it is, but need 75k to pay off credit cards and make it through next 6 months. I have no other debts and credit score of 800+. Any thoughts for options on cash out refinancing if I can keep LTV below 80%? Or any other creative exit strategies that will help keep my leveraged investment? (Main desire to sell is lack of cashflow to support pending major repair/maintenance of 50yr old home.)
    G. Brian Davis from Baltimore, MD
    Replied about 3 years ago
    One option is to sign a lease-option agreement with responsible renters who want to buy their first home. It wouldn’t solve your immediate cash needs, but you could come to some arrangement with them regarding repairs, where they are partially (or perhaps even fully) responsible for repair costs. Best of luck Hobie!
    Sara Kennedy from Greater Hartford, CT
    Replied over 2 years ago
    Great breakdown of the different options out there, thank you for sharing Brian! As a newbie who’s still researching the best option for getting started, this was really helpful!
    G. Brian Davis from Baltimore, MD
    Replied over 2 years ago
    Glad to hear it was helpful Sara! Please don’t hesitate to PM me any time with questions, I’m extremely responsive.
    Logan Brown from Fort Collins, CO
    Replied over 2 years ago
    Super helpful! Thanks a bunch Brian. I’m currently in the education phase of investing. My wife and I have only just recently even been considering investments as a means of passive income. We haven’t yet taken the plunge on our first property, so I’m doing as much research as my brain can handle to quell the (normal, I’m sure) fear in taking the first steps. I gather that eventually we’re just going to have to jump, maybe land flat on our face, but get up and go for the next one.
    Patricio Aguilar
    Replied almost 2 years ago
    Same here, Logan… Hehe…
    G. Brian Davis from Baltimore, MD
    Replied over 2 years ago
    Glad to hear it was helpful Logan! And while it’s a bit scary to buy any asset that valuable, the nice thing about rentals is it’s easy to forecast their returns. Don’t hesitate to reach out if I can help in any way!
    Fouad Elmoustaquim Rental Property Investor from Houston, TX
    Replied over 2 years ago
    Great article Brian, especially for newbies like me 🙂 Thank you!
    Patricio Aguilar
    Replied almost 2 years ago
    Thank you for the informative info! This was what I needed right now. 😉
    Account Closed
    Replied over 1 year ago
    I am Mrs Stacy, i want to invest in any business in good faith I have equity capital for profitable investment. Get back to me via email: [email protected] with your business proposal or your project plans for review. Thanks. Mrs Stacy
    Mike Justice Rental Property Investor from Location Kentucky and USA
    Replied over 1 year ago
    Question? I have found a great deal on a single family home and land, I can purchase for $25K Appraisal is 70K , I have to form a LLC to get a private lender for financing! And have 20% cash down payment! Here's the problem I don't have 20% down payment? Is there any way to structure the deal where I can put 20% required another creative way ???
    Charlene Garrison Investor from Detroit, MI
    Replied 5 months ago
    Thank you very much for the detailed explanation of these terms and processes. As a newbie, one of my biggest concerns has been trying to take it all in, but your advice to focus on one step at a time will really help me progress.
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Charlene, glad to hear it was useful for you!
    Wilson Pun
    Replied 5 months ago
    Fantastic write-up Brian, the step up requirements for the 5-10 loan category was something I didn't initially take into account.
    G. Brian Davis from Baltimore, MD
    Replied 5 months ago
    Thanks Wilson, glad to hear it was useful for you!
    Jag C. Rental Property Investor
    Replied 3 months ago
    At a 7% interest rate, and DSCR of 1.25, it must whittle down the properties that can produce a return, especially in the single family space, in todays market? Any thoughts on that?