How to finance rentals or fix-and-flip properties
Investment properties are properties that produce income — either in the form of rents or by selling the property at a profit. Many people just getting into real estate investment focus on residential real estate, but there are also investment opportunities in commercial and multifamily real estate.
Multifamily properties come in two categories. Properties with as many as four units are considered residential real estate. This includes single-family homes, duplexes, triplexes and fourplexes (also known as quadplexes). These properties typically can be financed with residential loans. Properties with five units or more are considered commercial properties, however, and cannot be financed with conventional loans — they instead must be financed with multifamily loans.
20% to 30%
As many as 10 with conventional financing
Fix-and-flip, buy-and-hold or commercial/multifamily
Once you’ve decided to invest in real estate, you may ask yourself, "where do I get financing to purchase an investment property?" The answer depends on the property type.
If you plan to purchase a residential property with one to four units and rent them out, you are eligible for conventional financing from a bank, which will likely get you the best interest rates and loan terms.
If you are looking to finance a fix-and-flip project, it may be difficult to find financing. If you have at least two years of experience under your belt, you may be able to find bank financing, which is ideal. If not, however, you’ll likely need to turn to hard money or private-money lenders. These nonbank sources of financing often come with higher interest rates and fees, but are often the only option for short-term financing.
Multifamily properties with five units or more are considered commercial properties, even if they are used for residential purposes like apartment housing. These must be financed with multifamily loans.
One of the most difficult aspects of purchasing your first investment property can be cobbling together a down payment. Unlike mortgages used to purchase a primary residence, for which there are many low down payment options, lenders typically require a down payment of at least 20 percent for investment property purchases. If you’re purchasing a property with more than two units, you may be required to make a down payment between 20 percent and 30 percent.
If you’re struggling to save up a 20 percent down payment, you may be asking yourself how you can buy an investment property with 10 percent down — or even less, if possible.
It’s possible, but there’s a catch: The property has to be your primary residence. Many of the low down payment options for purchasing a primary residence — including FHA and VA loans — allow you to purchase multifamily properties with up to four units as long as you’re living in one of them, while renting the other units out. These programs offer down payments between 0 and 5 percent.
The amount of money you can borrow for an investment property depends on several different factors.
Interest rates for investment properties can vary widely, depending on a number of factors. These include:
Investing in single-family homes is a relatively simple and affordable way to begin investing in real estate. But investing in commercial or multifamily real estate may be easier than you think.
Commercial properties include multifamily properties with five or more units (properties with four or fewer units are considered residential) and can also include industrial, office or other income-producing properties used solely for business purposes.
Investing in commercial real estate comes with advantages. Consider, for example, a residential real estate investor with five separate single-family rental homes, versus a commercial real estate investor with a five-unit apartment complex. Unless those five homes are located directly next to each other — which is unlikely — the distance between them makes it more difficult to travel between them for repairs, showings or other property management tasks. At the apartment, however, all the units are on the same property, making management easier.
The ideal investment property is different for each individual investor — but you shouldn’t discount commercial and multifamily properties out of hand. Consider the pros and cons of each carefully before deciding where to invest your hard-earned money.