Your eyes alight on the perfect rental property for sale. It’s in a hot rental location, good condition and at a bargain price. Desperate to snap up this dream unit for your portfolio, you rush online to check current rental property mortgage rates.

Only to be totally bamboozled by the sheer amount of choice available.

Getting a loan for a rental property can be an overwhelming proposition! How can you make sure you’re getting the best rental property mortgage rates on the market? What if a 20% down payment is only a pipe dream for you? Or do you keep being turned down for real estate investor loans because there are too many mortgages on your credit report?

Financing an investment property is often a stressful business for rental property investors. But it’s also a tried and tested path to financial independence and a strong passive income. Yes, rental property investment is a risk, but with the right information at hand, it’s also a calculated one.

So, here’s our guide to getting a loan for a rental property, including average mortgage rates and the different financing options available. No matter the size of your portfolio or the state of your credit rating — we’ve got you covered.

House Hacking

Itching to get on the road to financial independence, but you’re nowhere near able to afford a loan for a rental property? Real estate investor loans typically require higher interest rates and bigger down payments than traditional mortgages. So, if you don’t have the usual 20-25% down payment available, getting on that rental property investment gravy train can seem impossible.

But there is a viable solution for first-time rental investors — house hacking. This option allows you to generate an income by renting out portions of your owner-occupied home. Because it’s your primary residence, the down payment isn’t as steep as with financing an investment property. And you can take advantage of those tasty tax breaks.

Properties that suit house hacking include:

• Multi-family homes which are actually two or more units (for example, duplexes)
• Finished basements or lofts which can be rented out separately
• Additional dwelling units on a property (for example, guest houses)
• Multi-bedroomed homes where you can rent out extra bedrooms to tenants

The average mortgage rates for owner-occupied homes are approximately 4.2% for a 30-year fixed rate loan.

Pros:

• Reduce the usual down payment and interest rates that typically come with a loan for a rental property
• Take advantage of tax write-offs like mortgage interest deduction
• Use your passive rental income for financing an investment property

Cons:

• Not scalable — to grow your business you’ll have to look at other real estate investor loans
• Your tenants will essentially live with or near you, so you may never fully ‘switch off’

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Conventional Mortgages

The most popular real estate investor loans on the market are conventional mortgages. But because rentals are more likely to default than owner-occupied home loans, you need to be well-qualified to get a mortgage for rental property. Plus, these lenders have strict limits on the number of mortgages they’ll allow on your credit report.

Current average rental property mortgage rates for a conventional loan are 4.5-6% for a 30-year mortgage. Compare rates and fees using LendingTree for today’s numbers.

Pros:

• Rental property mortgage rates are low, maximizing cash flow
• Possible to extend the life of the loan for a rental property for up to 30 years
• Multiple interest rate options are available, like fixing for one or two years and variable for the rest

Cons:

• If you have too many mortgages listed on your credit report (usually four or more), you’ll have your loan for a rental property application turned down
• Conventional real estate investor loans are reported to credit bureaus, and too many mortgages on your credit report will wreck your credit
• LLCs or other legal entities are often barred from borrowing

Online Portfolio Lenders

So, house hacking only suits the startup landlord and conventional real estate investor loans are capped at around four properties. If you’re a long-term landlord, where can you get a loan for a rental property?

Online portfolio lenders offer affordable and scalable real estate investor loans. The best of the bunch, LendingOne and Visio, are collateral-based lenders who are more interested in the property’s value than the borrower’s credit rating.

The average rental property mortgage rates offered by online portfolio lenders is 6% for a 30-year loan.

Pros:

• Borrowing is not reported to credit bureaus, making it a more scalable option
• Visio doesn’t request income documentation
• Settle your real estate investment loans faster, within 10-14 days
• Buy-and-rehab properties are often covered, unlike many conventional lenders

Cons:

• Higher rental property mortgage rates than banks and conventional lenders
• Average 20% down payment, on a par with conventional options
• Offers fewer flexible terms than a hard money lender (but more flexible than conventional lenders)

Private Loan for a Rental Property

As you gain experience as a landlord and establish a track record of success, people you know might want to get on your rental investment gravy train. Private loans from individuals are a goldmine for the seasoned property investor.

A private loan for a rental property from friends and family gives you ultimate flexibility. And it’s fully scalable because you’re not dealing with credit reports. But private loans have more riding on them than just borrowing from a traditional lender.

Pros:

• Flexible rental property mortgage rates and terms, just what you agree on
• Your loan is pre-approved, avoiding the hassle of applying and being turned down
• No cap on the amount of real estate investor loans you have, so a very scalable option

Cons:

• Must be well-established as an investor to get full financing for rental property from friends and family
• There’s a lot more to lose than with a ‘professional’ loan if you default

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Want to compare investment property loans?

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Seller Financing an Investment Property

A more unusual way to get a loan for a rental property is to borrow equity from the seller of the unit. Basically, instead of giving the seller the entire sales price at closing, you draw up a repayment plan. Seller financing is a funding technique that can be a win-win for all, but it’s not always available to you.

Here’s an example: the seller inherits a property outright from a family member but can’t afford to renovate the property. Instead of paying taxes and local fees for a vacant property they can’t live in or rent out, they can finance you to turn the unit into a source of income.

Pros:

• Get a loan for a rental property without having to qualify for rigid criteria
• Rental property mortgage rates are completely flexible on what you both decide
• Less paperwork, therefore quicker than a conventional loan

Cons:

• Not available for all rental property sales, but worth asking the sellers directly in case they are interested
• Can be harder to negotiate with an inexperienced or nervous seller
• Potential hassle when dealing with multiple heirs if the property was inherited

Hard Money Lenders

Another collateral-based option for the rental property investor is using hard money lenders. These are professional, private lenders who can give you a loan for a rental property in lightning speed. But they are much more expensive than other ways of financing an investment property.

The average rental property mortgage rates for hard money lenders is 8-14%, with 1-4% upfront in points.

Pros:

• One of the quickest options for financing an investment property — get your money in as little as three days
• Will often offer real estate investor loans on untraditional or rehab properties that conventional lenders won’t consider
• Get a loan for a rental property based on the value of the property rather than your credit rating

Cons:

• Rental property mortgage rates are very high, and loans include a number of ‘points’ added
• Low loan-to-value (LTV) ratio — in other words, they will only lend 50%-70% of the purchase price

High rates coupled with a low LTV ratio means this option isn’t suitable for long-term mortgages but ideal for short-term renovation loans. You can quickly snap up and renovate a bargain, flip the property and then pay off the loan.

Over to You

Getting a loan for a rental property can be an overwhelming and tricky business. With so many loan options, lending institutions and rates available, it can be difficult to choose between different real estate investor loans.

House hacking is an excellent springboard into rental property investment. You’re classed as an owner-occupier, so your mortgage rates stay low and you can take advantage of tax deductions. But you’ll still get a passive income from your tenants.

Conventional mortgages are the most widespread and popular option for financing an investment property. But with strict caps on the amount of real estate investment loans on your credit report, they aren’t scalable. Once you’ve hit four properties or over, it’s time to look elsewhere.

If you’re serious about growing your portfolio, you’ll have to get creative when finding a loan for a rental property. Consider online portfolio lenders, private loans, seller financing and hard money lenders. If you weigh up the pros and cons, do your research and take calculated risks, you’ll be on your way to financial independence in no time!

Have you any other creative ways of financing an investment property? Any questions about real estate investor loans? We’d love to hear from you! Leave a comment below.

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About the Author

Yvonne Reilly is a landlord, property investor and solopreneur, passionate about helping people become financially independent and realizing their FIRE dreams. As a freelance writer, editor and digital marketer, she also helps small businesses connect with their audience and build traction. You can find out more about Yvonne on her website.

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