Yes, getting a mortgage for a rental property can be tricky for the self-employed. But as a self-employed entrepreneur, you do harder things every day.

If you want passive income and financial freedom sooner rather than later, leveraging other people’s money is the fastest path forward. And it is possible for the self-employed to finance a rental property safely and wisely.

You may be put off getting a loan for a rental property because:

  • You think it’s too risky
  • Your income rolls up and down like a yo-yo
  • You don’t have much of a down payment
  • Your credit score has seen better days

Here’s your easy breakdown of how to finance rental properties when you’re self-employed.


Why Get a Mortgage for Rental Properties?

When you’re self-employed, you may have heard horror stories about lenders requiring stacks of income documentation, scaring you off getting a mortgage for a rental property. And if your income is irregular, you might think the best option is to just finance a rental property creatively with seller financing, or even paying in cash.

But getting a mortgage for rental properties means you will grow your portfolio faster. A larger portfolio equals larger passive income (at least if you do it right), helping you get that much closer to financial freedom.

Buying with cash isn’t a scaleable solution. Let’s face it, you’d probably be saving for years to afford a rental property entirely in cash. Which means being unable to snowball your passive income in the meantime.


Sitting Out the Market

Right now, house values continue appreciating while interest rates remain low.

And don’t count on a housing market correction to drop property prices. Sure, home values could decline 10% over the next year; or they could rise another 15% before they drop by 10%. Even if you timed the dip perfectly and bought at the bottom (which is unlikely), you’d still pay more than today’s prices.

In other words, sitting out the market won’t do your investment portfolio any favors.

Increase your profit margin and ROI by learning how to finance a rental property even when you’re self-employed. The higher the property value you can afford, the greater the passive income potential.

Let’s say you bought a rental property a year ago, and property values have increased by 5% since.

  • If you bought a 50,000 rental property with cash only, your property is now worth $52,500. That’s a net gain of $2,500.
  • If you bought a $100,000 rental property with that $50,000 cash plus a $50,000 loan for a rental property, your property is now worth $105,000. That’s a net gain of $5,000.

When you’re self-employed you need all the passive income you can get. And, you can use the positive cash flow from one property to apply for another mortgage for a rental property. So, you’re fattening up your portfolio even faster.

Another reason why you should get a mortgage for a rental property is to help cover the expenses. There are the usual upfront costs like real estate agent fees, and regular expenses like taxes and property management fees. That means always having a certain amount of cash in hand.

Want to get on the investing ladder but don’t know where to start? Here’s our guide to getting a loan for a rental property. And check out our lenders page that compares different investment property loan terms.


Risks When You Finance a Rental Property

So, you know that getting a mortgage for rental properties is the best way to grow your portfolio pronto. But what are the risks?



If you’re self-employed your income isn’t guaranteed and can be variable. So, if you finance a rental property that’s vacant for months, you’ll have to cover these mortgage payments yourself. And you risk foreclosure if this coincides with a lean income period and you don’t have enough money in reserve.

The self-employed need a larger cash cushion than most, to shore them up during quiet times. And if you’re supplementing your earnings with rental investment income, savings are even more essential.

But you can mitigate the risk of vacancies by researching the neighborhood you’re buying in. Take a note of renter-friendly amenities like transport, shopping and schools. Properties in safe, high-demand neighborhoods may be more expensive, but are less likely to lie vacant for long.


Non-Payment of Rent

You’ve got a steady flow of passive income covering the mortgage, expenses and then some. But if your tenants stop paying their rent, what happens then? If you’re self-employed, you must make sure you have the income or savings to cover this.

You can reduce the risk of non-payment by making sure to screen your tenants carefully. Verify their income, run tenant background checks and inquire with their previous landlords. And, protect your loan for a rental property by ensuring every adult living there completes a rental application.

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Negative Cash Flow

If you underestimate the expenses and maintenance costs of your property, your cash flow will dry up fast. And you may have to siphon money from your main income to supplement the loan. If you’re having a lean month, you risk defaulting on your mortgage for a rental property.

I’ll be covering how to calculate your cash flow later in this article. But bear in mind that if you don’t do your homework, your loan may become a millstone around your neck.


Income Requirements

So, what are the income requirements to finance a rental property? A mortgage for a rental property can require substantial proof of a regular, stable income.

Or not, depending on what kind of lender you use.


Portfolio Lenders

A “portfolio lender” is a lender that keeps their loans in-house, on their own books, rather than selling them off to a large corporation like Wells Fargo. And if you can’t prove your income easily, or if your income is too erratic for a conventional mortgage, you’re in luck.

Lenders like LendingOne and Visio are more interested in the collateral of the property than your income. In fact, they don’t require income documentation at all!

Further, they don’t place any limit on the number of mortgages you can have showing on your credit report. As far as they’re concerned the more properties and experience you have as a real estate investor, the better. That makes them a far more scalable option for investors.

That said, they tend to charge slightly higher interest rates and fees than conventional lenders. So if you’re buying your first rental property or two, you may want to consider a conventional lender before transitioning to portfolio lenders.


Conventional Lenders

Obviously if you’re self-employed, your income could be irregular or unreliable. This can make conventional mortgage lenders nervous.

Salaried employees usually need to show 6-12 months of pay slips and up to two years of W-2 forms to get a mortgage for a rental property. If you’re self-employed, it’s not as straightforward. So, you’ll need other methods of proving your income.

To compare quotes from several conventional mortgage lenders, try tools like Credible.


Tax Returns

Some conventional banks require self-employed borrowers to provide two years of tax returns to qualify. However, more and more institutions are now requiring only one year of tax returns, including Fannie Mae which recently updated its self-employed guidelines.


Bank Statements

But how can you finance a rental property if providing tax returns isn’t an option? Luckily there are mortgage lenders that will allow you to use 12-24 months of bank statements to prove your income instead.


How Much of a Down Payment Do You Need for a Mortgage for a Rental Property?

If you want a conventional mortgage for a rental property, you’ll need a bigger chunk of change than for an owner-occupied home. Lenders want up to 25% of the property value as a down payment. Even portfolio lenders typically require 20-25% down.

The larger your down payment, the lower your interest. That means greater passive income in the years to come.

But what if you don’t have that much for a down payment? Often with rental property investment, where there’s a will, there’s a way!


Self-Directed IRAs (Roth)

If you’re self-employed, you may have retirement money in a self-directed IRA. Unlike traditional IRAs, Roth IRAs allow you to finance a rental property. So, you’re both increasing your passive income that will reach into retirement and diversifying your investments!

You could also use your Roth IRA to buy a primary residence for house hacking (more on that later).

There are risks involved, so make sure to talk to your CPA first and perform due diligence.


Take Out a Line of Credit

If you don’t have the down payment to get a mortgage for a rental property, you can borrow it against your properties. For example, you can take out a Home Equity Line of Credit (HELOC) on your primary residence,

Or if you have enough equity in one of your rental properties, you can borrow a down payment against this. Compare rates and quotes for a HELOC at Figure, either against your home or a rental property.


FHA Loans

Yes, FHA loans are not just for W-2 employees!

The self-employed can also be eligible for an FHA loan, which requires as little as 3.5% down payment, depending on your credit score. If you’re low on funds, it’s a nice way to hop on the property investment ladder.

You will however have to prove the following:

  • You’ve been consistently self-employed in the same line of work for two years
  • You work for a stable industry
  • Your income is consistent, stable and reliable, with no declines

But FHA loans are for owner occupiers only, I hear you say. Normally yes, but you can get around this by house hacking.

Traditional multifamily house hacking involves buying a multifamily property, moving into one unit and renting out the others. You still qualify for an owner-occupied mortgage for a rental property, but your tenants are paying off your loan.

You can also house hack single-family homes, through income suites or roommates or even foreign exchange students. Or you can outsource the live-in requirement and house hack through your adult children with ‘Kiddie Condo’ loans. FHA allows parents to co-sign their children’s mortgages with just 3.5% down. You just need to make sure your children will live there for over a year.

Other ways to come up with a down payment for a rental property is seller financing, loans from friends and family and even using credit cards. Check out these creative ways to come up with a down payment for some fresh ideas!

(article continues below)

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.

How to Finance Rental Properties When You Have Bad Credit

If you’re self-employed, you may not have the credit scores you need to get a mortgage for a rental property. Most lenders require a credit score of 620+ before they’ll part with their money. But don’t despair, there are still some options available for the wannabe investor.


FHA Loans

We’ve covered these loans earlier in the article. Good news is, they also suit lenders with low credit scores.

In fact, if you have a credit score in the 500-579 range, you can qualify for an FHA loan with a 10% down payment. It’s hard to get any mortgage with credit that low, much less a loan with a 10% down payment. Even portfolio lenders require a credit score of 620 and up.

So, if your credit score is low, consider house hacking as an option. Plus, when you’re self-employed your hours are often highly flexible — perfect for the hands-on property investor.


Private Loan for a Rental Property

You can also finance a rental property through those who know you best — friends and family. Even if your credit score isn’t great, there may be people who are willing to invest in property through you.

This is usually only possible if you’re already a seasoned property investor. But if you have the experience and your credit score has taken a nose dive, it’s an option. And it’s a win-win when friends and family have money to spare and you have the expertise to invest it wisely.


How to Calculate Cash Flow When You Borrow a Mortgage for a Rental Property

So, you’ve got your documentation in order and you’re ready to apply for a loan for a rental property. Not so fast! You need to calculate your cash flow first.

Calculating the ROI of a rental property is essential for all landlords. But as you’re self-employed, it’s even more important that you know the expenses and risks up front. If your income is irregular and your property is left vacant, are you still covered?

Take the guesswork out of the process by using our rental property ROI calculator. It accounts for both your upfront and ongoing costs, even the ones you might not think of.

And even if you’re managing the units yourself, you should still include property management expenses. Because the self-employed are only too aware of how much they need to get paid by the hour!


Over to You

Financing rental properties when you’re self-employed can be a nerve-wracking prospect. Applying for a mortgage for a rental property is less straightforward than with people who have a salaried job.

But rental property investment is an ideal way to boost your income. As it’s passive, it frees up time for you to spend on your other business. And you most likely have flexible hours, meaning you could manage the properties yourself.

You might be tempted to forgo a mortgage for a rental property and use cash instead. But this isn’t a scalable option. Instead, take advantage of low interest rates and increasing property prices through financing.

Even if you don’t have a down payment, or your credit’s bad, there are ways to get on the investment property ladder. You’ll not only increase your passive income. You’ll also be preparing for early retirement and gaining financial freedom.

Are you a self-employed real estate investor? What’s your tried-and-tested ways to finance your portfolio? Let us know in the comments!



More Landlording Reads:

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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