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How to finance rentals or fix-and-flip properties

What Is an Investment Property?

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.

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Down Payment

20% to 30%

Number of Properties

As many as 10 with conventional financing

Investment Types

Fix-and-flip, buy-and-hold or commercial/multifamily

Types of Real Estate Investment

There are two main types of residential real estate investment:

Rental (Buy-and-Hold)

For Rent
  • Long-term investment
  • Regular monthly rental income
  • You become a landlord — or hire a property manager, whose fees will eat into your profits

Fix-and-Flip

Fix and flip
  • Short-term investment
  • Property is fixed up and sold at a profit
  • You are financially responsible for making the repairs necessary to sell the property at a profit

How to Get a Loan for an Investment Property 

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.

One- to Four-Unit Rental Property

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.

Fix-and-Flip Property

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.

Properties With Five Units or More

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.

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Is Real Estate a Good Investment?

Advantages
  •  Passive income stream (if a property management company manages the property)
  •  Consistent monthly income for rentals
  •  Real estate can be used as a hedge against inflation
Disadvantages
  •  Properties must be managed — either by the owner, requiring expertise, or by a property manager, which eats into profits
  • Requires a large cash investment
  • Subject to regulations such as rental laws

Down Payment for Investment Properties

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.

FHA Home Loan

Number of Units
1 - 4
Down Payment
3.5%
Eligibility
Minimum credit score of 580 typically required; lower scores are acceptable with a larger down payment. Must have three months’ cash reserves if 3-4 units.

VA Home Loan

Number of Units
1 - 4
Down Payment
0%
Eligibility
Minimum credit score of 620 typically required. Must be a member of the U.S. military, guard, reserves, veteran, or a member spouse.

Freddie Mac Home Possible

Number of Units
1 - 4
Down Payment
5%
Eligibility
Minimum credit score of 660 typically required.

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How Much Can I Borrow for an Investment Property?

The amount of money you can borrow for an investment property depends on several different factors.

  • Down payment.  Investment property loans typically require a down payment of at least 20 percent (although if you plan to live in one unit of a rental property, you may be eligible for low down payment options from the FHA or VA).
  • Income. The more income you have, the more you can borrow. The obvious question is, can you include rental income from the property you want to buy on the mortgage application? If you have less than two years’ experience managing an investment property, many lenders will not include rental income in your mortgage application.
  • Credit score. If you have an excellent credit score, you’ll likely secure a lower interest rate. This will allow you to borrow more money, because you’ll be saving money over the life of the loan.

How Many Investment Properties Can I Finance?

Real estate investors can finance as many as six homes under conventional loan guidelines. If financing between seven and 10 properties, investors must have a minimum credit score of 720.

To finance more than 10 properties, seek a portfolio loan — a loan a bank funds itself without selling it on the secondary market — or a hard money loan, financed by private investors.

Interest Rates for Investment Properties

Interest rates for investment properties can vary widely, depending on a number of factors. These include:

  • Loan-to-value ratio. The lower your loan-to-value ratio — that is, the ratio between the mortgage amount and the property’s appraised value — the better chance you’ll have of securing a low interest rate, because you’ll have more “skin in the game.” Increasing your LTV is simple — just make a larger down payment.
  • Credit. As the investor seeking to borrow money, lenders will take your credit score into account. Before applying, get copies of your credit report. Report any errors and work to improve any areas dragging down your score.
  • Loan type. You’ll likely get the best interest rates if you can get financing through a bank. But bank financing can be tricky to secure for some investment property types, such as fix-and-flips. If that’s the case, you’ll have to look to private, hard money lenders, which charge higher interest rates — sometimes significantly higher — although they can also be easier and faster to qualify for.

Invest in Commercial and Multifamily Real Estate?

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.

Learn more about investing in commercial real estate.
Learn more about investing in multifamily real estate.

Residential Real Estate

  • Properties with 1-4 units
  • Typically affordable enough for lone/novice investors
  • Investors may make money by renting the property or selling at a profit
  • Non-diversified investment
  • Competing against non-investment homebuyers for properties
  • Owning multiple properties typically means they’re scattered over a wide area

Commercial/Multifamily Real Estate

  • Multifamily properties with 5 or more units; office, industrial and other income-producing properties.
  • Typically requires a large capital investment; working with other investors is often necessary
  • Investors typically make money off long-term leases
  • Diversified investment
  • Typically competing with other investors for properties
  • Multiple income-producing units are often contained within a single property

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