Investment Property Loans: The Ultimate Guide to Funding Your Deals

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She was a three-unit small apartment located in a great location, with stable tenants, and an ugly paint job. This triplex, which I call “Cherry Street,” was close to becoming the newest addition to my growing rental portfolio, but with Cherry Street I was about to do something I had never done before: start looking at investment property loans.

You see, before Cherry Street, I had only used conventional home mortgages, seller financing, and hard money lenders to invest in real estate. However, Cherry Street was purely a cash flow beast that I was hoping to buy, re-paint (please!) and hold on to for retirement.

However, as I began shopping around for a mortgage, I quickly realized that the process was not going to be the exact same as it had been in the past. What I soon realized was that investment property loans are slightly different than your typical home mortgage in several ways (but similar in several ways as well.) The information below contains a lot of the things I learned in my quest for the best investment property loan, and enabled me to get a great loan, with a great rate, from a great lender. It is my hope that this article does the same for you.

This article is going to look at exactly what a investment property loans are, the difference between and investment loan and a typical mortgage, tips for qualifying for an investment loan, and where to find the best loan for your real estate investment.

Investment Property Loans(Before we get too deep in this post, we want to invite you to download our book “The Ultimate Beginner’s Guide to Real Estate Investing” which will help you build a solid foundation for your financial future. In other words – you are going to learn exactly how to get started building wealth with real estate! To get the book, just click here and join BiggerPockets, the free real estate investing social network!)

How to Analyze a Real Estate Deal

Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.

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What Are Investment Property Loans?

As most readers on BiggerPockets already know, investment properties provide a vehicle that allow you to enjoy the potential for market appreciation while building equity each month. In addition, the monthly cash flow from a real estate investment can provide extra income to your wallet, help you pay down debt faster, or allow you to quit your job and begin living life on your own terms.

However, unless you have all the cash needed for your investment property, a loan is going to be required. Investment property loans can be used for either purchasing an investment property or refinancing an existing investment. Whether you are purchasing or refinancing a single or multi-family home, condo, or shopping mall – getting the best loan is essential to your bottom line. Investment property loans can also be used for real estate development, such as new construction, spec building, or raw land development.

The rate and term that you achieve is going to directly affect your monthly payment, which will affect your monthly cash flow — the life-blood of any real estate investor. We’ll look deeper at both “rate” and “term” in a little while, but first let’s look at the major differences between investment property loans and regular home mortgages.

conventional-loan

There are typically two types of investment property loans:

  • Residential
  • Commercial

Because lending institutions will typically have two completely different departments to deal with these different kind of investment property loans, as well as significantly different qualifying standards, it’s important to know the difference before you go searching for a loan. Let’s look at both those types of investment property loans in greater detail.

Residential Investment Property Loans

Residential loans are designed for properties that provide housing for individuals or families and contain four units or less on the property. These loans more closely follow a typical home mortgage, with similar qualifying standards and processes. These standards include:

  • Debt to Income: Your debt to income ratio is a number used by lenders to determine your ability to pay a certain debt based on how much income you make, typically in a given month. If you have $2000 per month in monthly debts on your credit report, but have an income of $6000 per month – your debt to income would be 33.33%. Debt to income can get a little more complicated than that as well, so for much more thorough information, please see “What Is Debt to Income?
  • Credit Score: Your credit score is a numerical number applied by three different “credit reporting agencies” and is designed to tell inquirers how you handle credit. On a scale from 300 to 850, you will typically need to have a minimum of 700 to obtain a investment property loan.
  • Loan to Value: The loan to value is another ratio, used by lenders to discover their risk on the property based on how much equity they have in the property if they had to foreclose. The loan to value, as the name suggests, is determined by comparing at the total loan amount to the total fair market value of the property. In the height of the last real estate bubble, many lenders were allowing a borrower to take a loan up to 125% of the value, but today, 70-80% is much more likely on investment properties.
  • Landlord Experience: While previous landlord experience is not a requirement to obtain an investment property loan, it can affect your ability to qualify for a loan. You see, as you attempt to obtain multiple loans for investment properties, your debt to income ratio climbs very quickly, even though that debt is being paid by a tenant. To help increase your income, a bank can add your rental income to your regular monthly income but usually will only do so after you have been a property investor for more than two years – though this requirement can differ greatly between lenders. Keep in mind also – that even with landlord experience, a lender will typically only apply 70-80% of that rental amount toward your income, to protect themselves against losses.

Typically, residential investment loans will extend for up to thirty years and the rate is generally some of the lowest rates you can find, usually between .5% and 1% higher than you’ll obtain for a home mortgage. To check out current rates on investment property loans, be sure to check out the BiggerPockets Mortgage Center.

loan_application

Commercial Investment Property Loans

Commercial investment property loans are designed for properties with five units or more, as well as other non-residential investment properties.

These loans can be used to buy or refinance anything from a shopping mall, apartment building (with 5 or more units,) an office complex, and any other kind of commercial investment. You will likely find higher rates than you’d get with a residential loan, as well as shorter lengths of time before the loan is due, with balloon payments often due after 5 or 7 years.

Commercial loans differ from residential loans in several key ways. Although they do look at the same standards as residential loans, they look at them from a slightly different angle. Let me explain:

  • Debt to Income: Obviously, debt and income is still important for a lender to look at, as it shows the lender what kind of person you are. However, when dealing with multimillion dollar loan amounts, a person’s personal income becomes much less important because, frankly, if things went south, a borrowers job income is not going to be able to make the payment, regardless. This is why commercial lenders look at commercial property with a different lens. Their decision is based much higher on two things:

    1.) The ability for the property to provide cash flow
    2.) The investors experience and ability to manage the business

    These two characteristics of the deal are much more important in decision-making for the lender than the official “debt to income.” This is why it is so important to obtain the best deal possible when looking for investment property. It is why I advocate “buying smart” when shopping for a real estate investment. When you are searching for a commercial loan, it’s also important that you portray yourself as the business owner that you are – not some hobbyist. Have a business plan prepared, know the answers to the questions they will ask, and know the deal inside and out. Consider a property investment loan request the same as a job interview – and come prepared.

  • Credit Score: Credit score is still highly important for commercial lenders, because it conveys your ability to handle money and credit well. Although the rates differ, a commercial lender is typically going to want to see at least 720 for a credit score.
  • Loan to Value: Loan to value is much more valued in commercial real estate lending than residential. As mentioned earlier, a commercial lender wants to be sure they are not over-leveraged and they have significant equity in the deal. Typically, a commercial lender will want a minimum of 70% loan to value (LTV) on a deal so they have 30% equity in case they need to foreclose and re-sell the property.
  • Debt Service Coverage Ratio: Exclusive to commercial investing, the debt service coverage ratio, or DSCR, is a ratio used by a lender to look at the properties ability to generate cash flow. Essentially, the DSCR compares the total income that comes in (not including the mortgage payment) with the payment on all debts.

    DSCR = (Net Operating Income) / (Debt Service)

    For example, if a property’s Net Operating Income (the total income left to pay the mortgage) is $10,000 per year and the total debt payment is $10,000 per year  – the DSCR would be “1.” Typically, a commercial lender wants to see a DSCR of at least 1.2 – meaning that after all the expenses are paid, there is at least 20% cash flow profit on top. Keep in mind -this is a very basic explanation of the Debt Service Coverage Ratio, so be sure to read this article on Wikipedia for a much more thorough explanation.

  • Landlord Experience: As mentioned earlier, a commercial lender is lending more more on the strength of your ability to manage than your personal ability to pay the loan. As such, experience is a highly important factor when a lender is considering your loan application.  Experience as a landlord is not always a requirement, but it definitely helps your case as a good bet for the lender.

wholesale-land-deals

Hard Money Loans/Private Lenders

An ultimate guide to investment property loans just wouldn’t be complete without a conversation about hard money lenders, or their cousin — private money loans — so let me briefly talk about the difference between both:

Hard money loans are short-term loans obtained from professional private lenders, who lend based on the equity in the deal more than the strength of the borrower. Typically, hard money loans are used by house flippers to purchase ugly homes, remodel them, and re-sell them on the retail market or to refinance them into buy-and-hold investments.

Hard money rates typically include both an interest rate and a certain number of “points,” (a “point” is equal to 1% of the loan amount) added to the loan or paid as a fee at closing. Interest rates are typically between 10 – 18%, with points ranging between 1-10 depending on the lender and the strength of the deal. Hard money lenders can be found in all 50 states. Be sure to check out the most comprehensive list of hard money lenders online here on BiggerPockets at BiggerPockets.com/hardmoneylenders and check out the video below for some tips on getting a hard money loan:

Private money loans are very similar to hard money loans (and the terms are often used interchangeably) but with less formality and typically not given by “professional lenders.” Private money lenders can be anyone with extra money, such as:

  • Your cousin
  • Your mom
  • Your next door neighbor
  • A co-worker
  • Someone you met on the BiggerPockets Forums
  • Any other individual looking for higher returns on their money.

In other words, private lenders are usually someone that you know. Because the investment property loans are much less formal, there are no rules as to the rates or points you will pay, though they typically slightly less than what a hard money lender may charge, with fewer (or no) points.

Many seasoned real estate investors turn to private money after the banks start saying no, finding win-win ways to close deals quickly without the hassle of dealing with banks or other lenders.

The most important aspect when dealing with hard money or private money are similar to those of a commercial loan, which means your ability to obtain a loan is weighted more heavily on the strength of the deal and your ability to manage the project than your personal income or credit score.

Be sure to check out these great articles on finding private money:

With both hard money and private money, the lender will place a lien on the property to protect their interest. Additionally, the loan typically does not show up on your personal credit report and are considered “non recourse” — meaning the lender can do nothing but foreclose on the property if you don’t pay (so they won’t be coming after your kneecaps with a baseball bat!)

Let’s wrap up our discussion on hard money and private money — and head back over to the institutional lenders and I’ll explain how to find those investment property loans.

under-contract-deals

How to Find Investment Property Loans

Investment property loans are not difficult to locate — though finding the best loan can often be difficult. In my opinion, there are two great ways to find lenders:

  1. Ask other investors for referrals
  2. Make a lot of phone calls.

Although this solution may seem too simple — it truly is a great way to find a lender. Most investors, such as those on BiggerPockets or at your local real estate investment club, can share the good and the bad honestly with you, with nothing to lose or gain by recommending you to a great lender.

As for what kind of lender you want to use, there are multiple options, so the rest of this section is going to explain several places you can look for investment property loans.

Banks

The first and most obvious choice for an investment loan is a bank, and the most popular choice for many real estate investors, especially for the first few deals. With thousands of different banks in the world, there are thousands of different loan products, so be sure to check multiple banks to find the best loan for your needs. Most banks sell their loans in packages to Fannie Mae or Freddie Mac, so they are very strict on their standards, thus flexibility and banks are generally not found in the same sentence.

** Click Here for Current Mortgage Rates **

Credit Unions

Credit unions can often be slightly more flexible, but still usually sell their loans and thus must abide by the same rules as banks when it comes to qualifying. For example, most banks and/or credit unions cap an investor between 4 and 10 loans, due to a requirement by Fannie Mae and Freddie Mac.

Portfolio Lenders

Portfolio lenders can be a great tool for getting more “creative” in your real estate financing. A portfolio lender can be either a bank or credit union, but have a distinct advantage for investors: they do not always sell their loans to Fannie Mae or Freddie Mac. Portfolio lenders can be a little more creative in their lending abilities and because the money is their own, they can invest how they want and thus can cater to real estate investors. For two great stories of investors who are using Portfolio Lenders to fund their real estate investments, check out:

Mortgage Broker

Finally, a mortgage broker is an individual or company that can search multiple (sometimes hundreds of) different loan products to find the best loan for you and your investment property. A mortgage broker generally works on commission and is often paid by you at the loan closing, so consider the cost of a Mortgage Broker part of the cost of doing business. However, not all mortgage brokers are created equal, so do your research and find a broker that is efficient, responsive, and effective.

find-deals-real-estate

Conclusion

Obtaining investment property loans is not impossible, but simply a matter of understanding the process and fitting the deal within the requirements of the lender. Hopefully this post has given you some help on that front and you can now begin shopping for your perfect investment loan to continue on your real estate investing journey.

[Editor’s note: This post has been updated to reflect new information and was republished in an effort to share the knowledge with our newer members.]

If you have any questions or comments about investment property loans, please leave them below in the comments. Or did I miss any large section to this ultimate guide?

Let me know and I’ll update this post!

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

37 Comments

      • Since we all are in to investing, or improve on it. Suggest we all come up with two numbers.
        1. Total of all salary income we made, for most it will show in our social security statement.
        2. Get value of our Net Worth, and Total value of our investments.
        3. get ratios of 2 divided by 1, and compare where we are now, since we all said our age in BP somewhere. You

        This will give us new goal, where we stand, how well we have done, and where we went wrong!!!
        . Your thoughts. Thanks
        kris

        • Can make it simple to compare, by 4 numbers 72/3/6 say. Meaning at age 72, have net worth 3 times total income, and total value 6 times.

  1. (Really wish I could save articles on BP to a ‘Favorite Article’ or ‘Investment Playlist’ section on my dashboard! Having the ability to sort them by subject would be nice too =)

    Can’t wait to read this article! Loan options are something I’m very curious about before taking our first action steps with REI.

    Thanks so much Brandon for taking the time to put this together. You do a great job with structuring your posts!

    • Taylor,

      What I do now is subscribe to the blogs, the articles are sent to my email. If its an article I want to keep for future reference, I move it to a subfolder in my yahoo account. A bit better than having to search for the article.

    • Lucas Pfaff on

      Hey Taylor – I have always hoped for something like this, but alas, even if you had it for BP there are probably a bunch of other sites you wish had the same feature. Bookmarks can serve the purpose but something about them just doesn’t work for me.

      I’ve had a lot of luck with Read Later Fast. It’s basically an app for the Google Chrome browser. So…if you use Chrome you can install the app which allows you to right click and “save” pages for reading later. Although I haven’t put any organization into it, I know it has the functionality for you to create folders or groups. Anyway, here’s a link if you’re interested in trying it.

      https://chrome.google.com/webstore/detail/empty-title/decdfngdidijkdjgbknlnepdljfaepji

  2. Brandon,

    Is “Investment property loan” an actual mortgage/loan classification/category in the U.S.A or your own classification?

    Hard and private monies aside, when going the conventional route here we have two categories of loan/mortgage:
    – residential {1-4 unit residential property, regardless if owner occupied or rented}; and
    – commercial {5+ unit residential or any mixed-use or non-residential property (office, warehouse, strip mall)}

    • Brandon Turner

      Hey Roy,

      It’s my own classification (I’m not a mortgage guy, just my way of viewing the world.)

      I try to separate “residential” and “residential – for investment” in my mind and when explaining it, because the most common type of residential loan – the FHA – isn’t good for non-owner occupied properties. So I just separate them, though perhaps bankers don’t think in those terms?

      Thanks for reading and commenting! I really appreciate it.

  3. Hi Kris,

    You are talking about triple net investing which has a debt market all it’s own.

    Walgreens you can get in for as little as 5% down. There is generally no rent increases in the primary term and 20 years is typical. Pharmacies are more for tax shelters and long term equity build up through principal pay down. These types of properties ARE NOT meant to be a huge cash flow generator and banks typically allow a 1.01 DSCR for a Walgreens.

    There are a few value plays for pharmacies that renewed an option period or only have 50 to 10 years or so left on the primary lease. CVS the best you can do is about 10% down as lenders are a little less bullish on those and Rite Aid’s being at the bottom.

    You can find more yield in other types of NNN assets but typically have to put 25% down or more on this properties (dollar stores, banks, restaurants, retail, etc.)

    The important point with commercial loans is that prices are at rock bottom in many parts of the country so leveraging into the properties with the best potential is key.

    Single tenant cap compression has happened by about 100 basis points over the last 2 years and many are looking at NNN retail strip centers for more yield.

    • Thanks for your input, also like Autozone. At age 72, wanted NNN for estate planning purpose, got new 25 yr lease with upto 75 yrs option. True no rent increase due to better Walgreens credit rating, supply and demand!!! Got at 7.35% Cap in 2010, and cap now 5.5 -6%.

      • Hi Kris,

        Yes many of my clients love the Auto Zones. We are closing on one next week at around a 7 cap and it has only 7 years left in primary term.

        The sale price was low at 1 million plus so at the end of the term not much debt service will be left limiting exposure. Some brokers are listing some Auto Zones at crazy 5 caps but nobody is buying at that price. You can ask whatever you want you want but it’s what it sells at that matters.

        My buyers like Auto Zones balance sheet over Advance and O’reilly’s. Auto Zone is actually trying to buy back their stores but at an 8 to 9 cap and they are losing out to regular investor buyers on existing lease at a 6 to 7 cap purchase range. Debt is in the 4’s so not much spread for COC at a 6 cap. This is why my buyers want close to a 7 at least for an Auto Zone.

        It only makes sense if you are an all cash buyer at a lower cap but most REIT’s have to service the property and then make the spread on the back end so they are not a buyer in the 5’s but sometimes in the 6’s.

  4. Hey Brandon – What another great, indepth article. It’s imperative that folks learn how to raise private capital in this business. The folks that are doing this on a regular basis, have got it down to a science.

    One thing I have learned is never to “pre-judge or pre-qualify” anyone. You never know who the “millionaire next door is”.

    Sharon

  5. Brandon, great article and its helpful to have all that info in one place. One question I had – for residential properties (quads or below), if you are getting the loan to an LLC (with a personal guaranty) can you get the same “up to 30 yr” fixed terms with slightly higher interest rates? Perhaps via the portfolio lenders? Again thx!

    • Brandon Turner

      Hey Drew,

      Thanks for the comment! I probably should have covered this in the article, but I believe that it would be tough to get a residential loan for a property in an LLC. I think most investors transfer out to their personal name, and then back to an LLC after closing. Perhaps a portfolio lender, since they kinda do whatever they want, but I still kinda doubt it. Hope that helps!

  6. Wonderful content! I am in the process of purchasing my 4th property and I am running into the debt to income issue since they are not counting my rent (we bought our first property 1year and 9 months ago).

    One issue that was not discussed in this is the seasoning of funds but if a new investor does not know that the funds need to sit for a few months in the account or be able to be tracked it can be a royal pain for them when they are trying to get the loan closed.

    • Hi Jared,
      Im new to investing and am looking into my first property. Would you explain what you mean about the “seasoning of funds?” I wasn’t aware of it at all until you mentioned it and would like to avoid that royal pain!
      Thanks!

      Emily

  7. This is a great primer and I’m glad you are seeking more content from mortgage professionals. Over the past two years, I have learned by trial and error the “rules” of obtaining financing for rental properties. It never ceases to amaze me the depth and breadth of information required, the last minute fire drills, and that somehow, the loan still manages to close. It’s all perplexing and confounding. I am now switching from a mortgage broker to a local bank that underwrites and holds all their own loans, so I am hopeful this will result in a smoother process.

    One point I’d like to make, is in this very new world of **rapidly** changing interest rates, be sure you know your rates and fees, and that they are LOCKED! I recently signed all the paperwork for a building mid-May (including the rate lock form), only to find that the rate was floating for two weeks before I found out this was the case! This error cost me a half point in the loan rate and an additional $3000 in closing costs since the market went crazy in the interim. Very, very frustrating.

    • I had bad experience with a broker too. They want to make the highest. Better off with direct lender, where all decisions are made in-house. Saved 12k by doing this, had to switch from broker to direct lender, but was happy.

  8. In regards to your question. My little advice is that you go to a bank in your area to request for the loan, and that is if you have a collateral, but if you want a loan from those that give out unsecured loan without a collateral i know of a loan firm that gives out unsecured loans, though he is the only one i have tried for now so i don’t really know if their interest rate is the lowest. Few months ago when i had a bad credit, a friend of mine introduced me to them, inspite of my bad credit they were able to lend me a loan of $20,000 of which i used to revive my business, I think you too can do the same as well. Here is their contact information if you wish to contact them. ([email protected])
    Regardless of your nationality, i am sure they can be of help to you.
    Good Luck,
    Della Roland.

  9. I think too many new investors are afraid of Hard (Private) Money loans because of the interest rate. However, the ability to close quickly often makes it worthwhile. However, you need to be sure of your exit strategy up front. I am a private lender and, if I lend for 12 months, I want out at 12 months. If the plan is to rehab and sell, find a buyer right away. If the plan is to refinance and rent, have your ducks lined up. I just returned from Boston. Thirty years ago I bought a Loft Condo for $130,000. This is prime downtown real estate. Initially, there were 20 parking spaces which sold with the first 20 units. By the time I bought they were all gone. Since they generally sell with the unit, it is rare for one to become available. Last week, the security guard told me that there was a space available – the buyer of the unit was at the top of his budget ($779,000) and was letting the parking go separately.I contacted the Broker, said I was paying cash and could close immediately. Although I had the money, a Hard Money Loan would have worked too. Critical was the ability to move fast. Most amusing is the price I paid for the space: $130,000! Of course my Unit is now worth about $750,000 by itself.
    I’m not sure how much is inflation and how much is appreciation.

  10. Heather Longfellow

    Great topic recently I went to bank for commercial loan on a 10 unit for $700,000 they told me 4.4% 20 year note 20% down $140,000 I wanted to do a cash out refi on another property for the down payment they said 10% had to be cash.Thats $70,000 cash is this normal on larger deals?

  11. Garrett May

    Thanks for the information Brandon. I just purchased my first investment property through a residential investment loan from one of the local banks in my area. This gives me some insight as I look to add to my portfolio.

  12. Martha J Escudero Acosta

    I want to be the first person that says this in public Brandon: I believe in last names. Like Gates and Jobs do, you honor your last name. I was searching for good REI YouTube videos that I could stay tune. After watching some others I found one of yours that I followed to BiggerPockets.com. I haven’t left since then. It’s good knowing when our gut doesn’t betray us. Please do not feel responsible if I do not follow through. The responsibility is entirely mine. I am only absorbing your knowledge slow, steady and objectively. Thank you for all that free-dom (my word). Bigger Pockets is the school I needed (no school loans, just investing loans).

  13. Scott Schultz

    Dont overlook Commercial lenders for 1-4 Family, and Flips as well, I have been doing that for years, i can usually do 80% LTV (lower of purchase or value) on a purchase, or 75% LTV (valuation) on a refi. I use a LOC to purchase with Cash, rehab, rent and then put permanent financing in place to pay back my fix up and pay off the LOC. not every bank will do this, so you need to shop around. my cost to do a loan is quite low, only $500-$700 and and at a rate of 4.5% (pretty good on the commercial side) now we do 3 year balloons on a 15 year Amm, to keep the rate down, with every intention to only re-up the loan 2-3 times. (pay off in 10 years or less.

    Flipps the Comm guys do me at 4.5% for 6 mo. Interest only amm’ed at 20-25 years, no cost to re- up after 6 mo if needed. Dont over look the Commercial Lender at the small local Bank, they have resources, and tons of money to lend.

  14. Judith Heymann on

    I am a private lender, i offer loan at 3% interest rate this is a legitimate company with honor and difference we are ready to help you out in any financial problem that you are we offer all type of loan so if you are interested in this loan offer kindly contact us on our email: ([email protected])

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