One of the great advantages of investing in real estate is leverage: the ability to buy your own assets with other people’s money.
The property appreciates in value, even as your loan balance shrinks. Your rents go up every year, while your debt payments stay fixed. That makes real estate a great hedge against inflation, along with its many other benefits.
But if you’ve ever tried to get financing for an investment property, you know how hard it can be. So, how do you get a loan for an investment property with a low down payment?
Try these lenders and loan types as you explore how to get a loan for a rental property.
Financing for an Investment Property: An Overview
When you borrow a mortgage as a homeowner, you work with traditional lenders. They issue conventional loans, following strict loan programs detailed by Fannie Mae and Freddie Mac, and also government-backed loans such as FHA, VA, and USDA loans.
If you don’t mind living in the property yourself for a year, you can use conventional mortgages to finance an investment property. You can also take out a conventional loan for an investment property immediately, although they come with some downsides — more on those shortly.
However, most real estate investors quickly graduate to portfolio lenders. These lenders keep loans on their own books rather than bundling and selling them like conventional lenders. They’re better than conventional mortgages in almost every way, but tend to cost slightly more.
From there, you can explore more creative financing, such as owner financing and private loans. You can even use HELOCs and credit cards to buy rental properties, or at least cover the down payment.
Short-term hard money loans can also play a role, letting you refinance after renovating so you can pull your down payment back out of the property. You might know it as the BRRRR strategy.
Here’s what you need to know about each of these loan options for financing an investment property with a low down payment and high returns.
Using Conventional Mortgages for Investment Properties
You have several options at your disposal for using conventional mortgages to finance rental properties.
House Hacking with Owner-Occupied Loans
House hacking involves finding ways to generate income from your home to offset your mortgage and other housing costs.
The classic model involves buying a multifamily property, moving into one unit, and renting out the other(s). Read how one young man house hacked a duplex to live for free as a case study.
But you don’t have to move into a multi-unit property to house hack. Ideas for house hacking a single-family home include housemates, adding an ADU, finishing a basement or garage apartment, renting out storage space, and even hosting a foreign exchange student. Deni did the latter for four years, and the stipend covered most of her monthly mortgage payment! Read up on more house hacking ideas here.
The upshot: you can borrow an owner-occupied loan with a low down payment. For example, you can take out a 3% down Fannie Mae loan to house hack.
You don’t even have to live there as your primary residence for very long. Once you’ve lived in the property for one year, you’ve met the occupancy requirement. You can move out and keep the property as a rental.
For that matter, you don’t have to house hack at all during that year. You can live in the property by yourself for a year, then move out and sign a lease agreement with renters.
Try Credible for conventional mortgages. You can also try your local community bank or credit union.
An alternative model for house-hacking involves live-in flips.
You buy a fixer-upper, take out a 203K or other home renovation loan, and move into the property while you make repairs on nights and weekends.
Once you finish updating the property, you can sell it for a profit and do it all over again. Or better yet, you can keep it as a rental property. When it’s all said and done, you end up with a loan for an investment property with a low down payment.
Conventional Loans for Rental Properties
Conventional mortgage lenders do write direct rental property loans. But they’re a pain in the a$$ in every way.
First, the upside: they tend to cost less than portfolio loans. You can potentially borrow money at a 0.5-1% lower interest rate on investment property loans. Plus, they tend to charge fewer points than portfolio lenders. They also don’t charge private mortgage insurance, since they cap the LTV at 80%.
Unfortunately, it’s all downhill from there.
Conventional lenders are slower than portfolio lenders, demanding more documentation and coming back to you every few days to ask for more information. Expect them to take at least 30 days before closing, possibly 60.
They also require proof of income, unlike portfolio lenders.
Worst of all, conventional lenders report to the credit bureaus, and they cap the number of mortgages that can appear on your report. Most loan programs allow just four mortgages total — including your home mortgage, investment property mortgages, and any second home loans — before they stop lending to you.
That means you have a hard limit on the number of conventional loans you can take out.
Portfolio lenders keep loans within their own portfolios, rather than selling them off to giant corporations like Chase or Wells Fargo (the way conventional lenders do).
It gives them more flexibility, but it also means they hold the long-term risk for the loan. If you default, it’s their problem, not some faceless corporation’s.
Portfolio lenders are faster and more flexible than conventional lenders. Many can close investment property loans within two weeks if necessary.
They also don’t require income documentation such as tax returns, unlike conventional lenders.
Best of all, portfolio lenders don’t put a cap on the number of mortgages you can have. Quite the opposite — they prefer working with more experienced investors, and offer them better pricing.
A few of our favorite portfolio lenders include:
The down payment requirements are similar to conventional lenders’, typically in the 20-30% range. Portfolio lenders also require similar minimum credit scores, most often 680 for a rental property loan, but a few lenders allow as low as 620 (Patch Lending, RCN Capital) or even 600 (Civic Financial). They sometimes charge slightly higher mortgage rates, but not so much as to break your deal. Think 4.5%-5.5% instead of 3.5%-5% in today’s market.
While not every seller will entertain the notion of owner financing, many prove open to it if you make a compelling case.
You and the seller negotiate your own loan terms, from interest rate to fees to the length of the loan. In many cases, the seller demands higher interest than you’d pay to a portfolio lender, but lower (or no) points and fees. Those lower closing costs can easily offset the higher interest, since you’ll probably only have the loan for five years or so.
Most sellers don’t want to sit on a mortgage loan for the next 30 years, so they require a balloon payment. So, you might make monthly payments as if it were a 30-year mortgage, but within five years you either need to refinance or sell the property.
If the seller has a mortgage against the property, you may be able to buy the property subject to their loan. You assume the mortgage and start making the monthly payments.
The seller may not even pull your credit report, but savvy owner financiers will.
As with everything else in life, you get what you negotiate. Start working on your pitch, and you’ll be surprised at how many sellers warm to the idea of owner financing.
Other Private Loans
Sellers aren’t the only individuals who can lend you money.
You can borrow from family members, friends, neighbors, acquaintances, and anyone else with a pulse. In particular, you can find success borrowing from other real estate investors. For example, I have some of my personal money invested in a private loan with the Thompsons, who retired in their 30s on rental income.
Like seller financing, the terms are 100% negotiable. You negotiate the interest rate, fees, loan length, and whether the loan is secured with a lien.
To borrow money from individuals, however, you need a track record of successful real estate investing. You need to be able to prove that their money is safe with you.
Only consider borrowing from private lenders if you have at least five or six deals under your belt and can reliably forecast cash flow.
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Hard Money Loans & the BRRRR Strategy
Let’s get clear on terminology: a hard money loan is a short-term loan to help you buy and renovate a fixer-upper. Once you finish the repairs, you sell the property as a flip and pay back the loan.
Or you refinance it to keep it as a long-term rental property. Known as the BRRRR strategy, the acronym stands for buy, renovate, rent, refinance, repeat. But here’s the kicker: when you refinance, the loan amount is based on the after-repair value, according to an appraiser. So you can take cash out when you refinance, to cover your original down payment.
Many portfolio lenders also offer hard money lenders. They issue both types of loans and you can refinance your hard money loan with the same lender.
HELOCs & Credit Cards
I once bought a house and renovated it all on credit cards. Don’t try that at home, though, unless you’re a veteran investor — you need to be able to pay off the card balances extremely quickly to avoid massive interest.
Still, real estate investors can use HELOCs, business credit lines, and unsecured business credit cards for financing an investment property, repairs, or down payments combined with portfolio loans. For example, you get a 80% LTV loan from Kiavi, and draw on your HELOC for the 20% down payment. You then pay off the HELOC as quickly as you can, so you can turn around and do the same thing with another property.
Try Figure for HELOCs, including HELOCs against rental properties. To raise between $100,000-$250,000 in unsecured business credit lines and cards, use Fund&Grow. And yes, real estate investors qualify for business lines of credit and cards. Check out this video explanation of how it works.
Just beware that the more leverage you use, the greater the level of risk. You risk your monthly cash flow, after subtracting for property management fees, repairs, maintenance, property taxes, insurance, and vacancies. You also risk becoming upside-down on the property, with so much leverage.
How to Get a Loan for a Rental Property
Getting financing for an investment property isn’t hard, once you know where to look.
Start thinking in terms of building a “financing toolkit” of options to fund rental properties. You want to build relationships with as many lenders as possible, and open rotating lines of credit such as HELOCs or unsecured business credit lines and cards.
Often you have to move fast when you find a great deal on a property. For instance, you find a distressed seller who needs to settle within the next ten days to avoid foreclosure. Experienced real estate investors know how to get a loan for a rental property quickly enough to close those deals.
When you’re first starting out, consider house hacking or living in a property for a year before moving out. The Hoeflers repeatedly house hacked four-unit properties, buying a new one and moving in each year. They reached financial independence in five years with that strategy!
When you no longer want to live in the property, turn to portfolio lenders. Then, start pitching sellers on owner financing. Some will agree, some won’t, but it’s another tool among your financing options.
Eventually, after building up a track record of successful deals and strong cash flow, you can start raising money privately. But don’t start here as a new investor.
The more diverse your financing toolkit, the better your odds of scoring loans for investment properties with a low down payment.♦
What are your favorite ways to finance investment properties?
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About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.