Investment Property Loans: The Ultimate Guide to Funding Your Deals
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.
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.
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.
(Continue reading on BiggerPockets…)
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