Real estate is a powerful long-term investment strategy that generates passive rental income. However, the high starting cost makes it difficult for real estate investors to get started with owner financing alone. Luckily, it's possible to finance a rental property with a smaller upfront cost if you obtain the right investment property loan.

However, it's important to carefully weigh your options for rental property loans to ensure you choose the right product. 

What is an investment property loan?

An investment property loan is a tool that provides financing for rental properties, whether they are long-term residential rental properties, vacation homes, or commercial buildings. These are specialized products private lenders provide to real estate investors. They often have slightly different terms and mortgage rates than owner-occupied property loans.

Other Types of Investment Property Loans and How Ours Compare

Real estate investors have a variety of options when seeking a rental property loan, including a traditional mortgage and a hard money loan. The rental property mortgage you select depends on your investment goals and your personal circumstances. We can assist you in determining which property loan is right for you.

Conventional Bank Loans

Most rental property loans work very similarly to those for private residences, as they follow Fannie Mae's guidelines for underwriting. They include a hard credit pull and are based on a minimum credit score, as well as extensive financial documentation.

Mortgage lenders will review your company's income, assets, and credit history. They will also investigate your personal financial circumstances, such as your debt-to-income ratio, before approving you for an investment loan. Also, if you only provide the minimum down payment, you'll need to pay for private mortgage insurance. The minimum loan amount is generally lower, making conventional loans a salient option for small-time investors who only want one or two investment properties.

In contrast, our property loan programs focus on the property's cash flow to ascertain whether it produces enough income to cover the monthly mortgage payment. While we do have minimum credit score requirements, our underwriting process mostly focuses on the debt-service coverage ratio, which is the gross rental income divided by the monthly payments.

Although there is a higher down payment requirement, this eliminates the need for private mortgage insurance. The interest rates are slightly higher, and there are prepayment penalties if you pay your mortgage loan ahead of time, but the maximum loan amount is higher than for a conventional loan.

Hard Money Loans

Hard money loans are investment property loans generally used for flipping houses: they have very short loan terms, often under two years. Because they have such a brief repayment period, the interest rates are very high, and they place the real estate investor at major risk of default unless they have a strong cash flow and a good exit strategy.

Hard money lenders require a large down payment, more than for a long-term rental property loan. You'll also need ready cash reserves to cover expenses during renovations, which the lender will then reimburse.

Because of the risks, hard money loans should only be used by experienced real estate investors with a clear plan for their rental properties. Longer loan terms place you at a lower risk of default, so those intending to hold their investment properties rather than flip them may benefit from a DSCR loan instead.

Our rental property DSCR loan program offers reasonable interest rates, low closing costs, and a down payment requirement comparable to a traditional commercial business loan but without the need for extensive financial documentation.