In the US, 14.1 million property investors own between one and four units. As it becomes harder for people to get on the housing ladder, the demand for rental properties is increasing. So how do you manage to get the capital to get your first investment property?

The first step is to get the right financing. Read on as we give our guide on how to secure an investment property lender for your next venture. 

What Is an Investment Property?

An investment property is defined as a property that you buy to earn rental income from, or renovate and flip for profit. The term usually applies to one to four-unit homes and does not include commercial property. Even properties that you may live in for part of the year can qualify as investment properties. 

Real Estate Investment Loan Types

There are a number of different financing options available to those who want to buy for investment. Some of the more popular ones are listed below. 

Conventional Bank Loan

A bank loan is the most conventional lender for an investment property. Anyone who has a mortgage on their main home will know how these work. When getting one for an investment property, the process is almost the same. 

The only major difference is that qualifying for an investment loan on top of the one for your main abode may be a bit stricter. The lender will want to feel confident that you are able to pay both mortgage loans, even if rental income will pay the majority of the payments. 

Hard Money Loan

Hard money loans come from companies that target real estate investment. Loans are normally based on the value of the investment property as opposed to the lender’s income or credit score. This means that qualifying is often much easier than it is for a bank loan. 

One major difference is that they tend to be for short-term loans. This makes them much better for flipping properties rather than buying and holding. 

Private Money Lender

A private money lender is someone not affiliated with a bank or company, who wants to make a profit from giving out an investment loan. You may find them through family, friends, or colleagues. 

The legal framework is usually backed by a promissory note. This gives the lender some legal backing and allows them to foreclose the home if you don’t keep up payments. On the plus side, interest rates are often very favorable and terms can be negotiated. 

Home Equity Loan

A home equity loan can be used by people who already have a mortgage on their current property. You can borrow against the equity built up in the asset. 

All you need is a verification of the home’s appraised value. With this, good credit history and statements of income should be provided. Getting a loan in this way often gets you a very favorable interest rate. 

The major downside is that you are putting your primary residence as collateral. If you fail to make payments, the lender can seize your main home. 

Investment Property Loan Requirements

When you have decided on an investment loan, there are a number of requirements you need to consider. It may be worth putting these in place before you make an application. 

Down Payment

A down payment is usually needed to qualify. Single-family properties will usually require around 15% to 20% of the overall amount. If you are lending for a multifamily home, then you will need around 25%.

This down payment can be lowered quite considerably if you decide to live in the property. For example, if your loan is for three units and you live in one, then you may be able to get away with less of a downpayment. You may also consider FHA or VA loans which can take it down even further. 

Credit Score

Your credit score will determine if you qualify for the loan. Crucially, the better it is the more impressive the terms will be. Backed up with cash reserves and low debt to income ratio, you are sure to be able to get a good deal on a loan. 

The minimum credit score is around 680. The higher your down payment amount, the lower this credit score rating will go. 

Investment Strategy

Before applying for the loan, it is worth getting a clear picture of your investment strategy. Once you have the finances in place, the next step is to think about how you will manage the property itself. This can have a marked impact on your finances.

If you are buying and holding, then you want something long-term, possibly with a fixed rate. This stable monthly payment will allow you to rent out the property and manage your finances around it. If you are buying to fix up and sell, shorter-term loans may be more beneficial. 

Benefits of Investment Properties

Once you have financing in place, you can begin to reap the rewards of an investment property. The first of these is that you gain extra income.

If your rental income is greater than that of the mortgage payments, then you will make a small profit. If you have multi-family units, then you could be earning a considerable amount each month. 

Regardless, you will make a profit through appreciation. The value of the property will rise over time, meaning you have a solid asset. Even as you pay off the loan you accrue equity, which can be released later or used to fund other properties. 

Sourcing an Investment Property Lender

Now you know your options for an investment property lender, shop around. Different lenders will have different terms. The earlier you start, the easier it becomes to find the best one. 

Memphis Investment Properties should be your first stop. We have everything you need to start your real estate journey. Contact us here to discuss your needs and see what we can do for you.