Investment Property Loans: How to Finance a Rental Property

Are you looking to enter the real estate business, but lack the capital necessary to expand? An investment property loan might be your ideal solution.
If you’re wondering how to finance your next real estate investment, we can help. Whether you’re just getting started with real estate investing or you’re a seasoned investor, Griffin Funding can help you identify a mortgage that aligns with your goals. Keep reading to learn more about how to purchase an investment property and review popular investment property financing options.

What Is an Investment Property Loan?

An investment property loan will help you purchase homes that you can then use to rent out or flip for profit.

Often, investment property loans are set up as fixed-rate mortgages that typically have a higher barrier of entry and have higher interest rates. Conventional lenders generally charge a quarter to one-half percent more interest on a loan for a rental home than if the same home were used as the borrower’s primary address. Of all the different types of residential rental properties, the single-family home offers the lowest interest rate.

The most commonly available investment property loan for a non-owner-occupied property is a conventional loan that provides 75% of the appraised value or the purchase price — whichever is lower. However, Fannie Mae and Freddie Mac will make financing available up to the 80% loan-to-value level.

Griffin Funding offers investment property loans for those interested in buying or refinancing rental properties and second homes, whether it is a:

• Single-family home
• Condominium
• Planned unit development (PUD)
• Multifamily 2-4 unit dwelling

Griffin Funding strives to provide borrowers with more accessible mortgage loans by offering flexible terms and competitive investment property mortgage rates.

Types of Investment Property Loans

When it comes to investing in real estate, there are many different approaches you can take. Using the right investment property mortgage product can help you get the most out of your time, money, and efforts. However, the right type of investment property loan will depend on what you qualify for and what your goals and preferences are.

It’s also important to keep in mind that, while some mortgages are designed for real estate investors, other consumer mortgage products can facilitate your real estate investment goals as well. For example, you can potentially use VA loans and FHA loans to invest in real estate — although some restrictions will apply.

To better understand how to finance a rental property, it’s important to know the mortgage options available to you and how they differ from one another. Below, we list some of the loans for investment properties that we offer and go into a little more detail about what each loan type entails.

Conventional Loans 

As mentioned above, conventional loans for investment properties are typically set up as fixed-rate mortgages with standard terms for borrowers. While conventional loans will come with higher rates when used for an investment property rather than a primary residence, they still offer highly competitive rates relative to other investment property loans.

However, the qualification requirements for conventional loans are rigid, and it can be difficult for some borrowers to qualify, especially if you’re self-employed or have non-traditional income.

DSCR Loans

A DSCR loan enables you to qualify based on your property’s cash flow and not your personal income. It is an easy way to expand your real estate portfolio because it allows us to determine your ability to make payments without needing your tax returns or W-2s.

This type of financing is tailored for real estate investors, as DSCR loans can only be used to purchase income-generating properties. With a good debt service coverage ratio—which is the ratio of a borrower’s annual gross rental income and annual debt—you can qualify for competitive interest rates and lower necessary cash reserves.

Bank Statement Loans

A bank statement loan is a type of non-QM mortgage that caters to self-employed borrowers. While many mortgages require borrowers to provide proof of income in the form of tax returns or W-2 forms, bank statement loans allow self-employed borrowers to submit a series of bank statements as proof of income instead. This can be a great solution for those who have inconsistent income or whose income isn’t accurately represented on their tax returns due to write-offs.

Bank statement loans can be used to purchase not only primary residences, but also second homes and investment properties. This investment property financing option provides self-employed borrowers with a great deal of flexibility when it comes to qualifying.

VA Loans

VA loans can be used for some investment properties. A VA loan can only be used for homes up to a maximum of four units, and you must occupy one of the units. You can’t use your loan towards anything classified as anything but real estate, so mobile homes, RVs, or houseboats do not qualify.

You also must live on-site. If you purchase a multi-unit property, you have the option of renting out the unused units for rental income. However, using those rentals as short-term rentals is not allowed. So, Airbnbs, bed-and-breakfasts, or other rental agreements lasting 30 days or less are prohibited.

2-4 unit properties have higher VA loan limits than single-family homes. If structured properly, you can use a VA loan to buy a 2-4 plex investment property with zero down payment.

FHA Loans

Just like with VA loans, FHA loans are intended for buyers of a primary residence. The borrower must live in the home for the majority of the year. However, after one year of ownership, you may be able to move out and rent the home if you need to move or the house becomes too small.

Also, like a VA loan, an FHA loan can be applied to a property with up to four units. As long as you live in one of them, the other three can be rented out.

FHA loans can be an affordable way to invest in property because they allow for a down payment as low as 3.5%. Additionally, local FHA loan limits are higher when a property has more units, so you can potentially buy a home with multiple units and rent out some of them without exceeding the FHA loan limit.

Home Equity Loans

If you’re already a homeowner, you can leverage your current home equity to purchase an investment property by using a home equity loan (HELOAN). A HELOAN, otherwise known as a second mortgage, is a type of loan that’s secured by the borrower’s existing home equity.

You can use the funds you get from a HELOAN to finance the purchase of an investment property. Alternatively, if you already own an investment property, you can use HELOAN funds to renovate or upgrade the property, which in turn can increase the value of the property on the rental market.

Asset-Based Loans

If you have low or unsteady income but significant assets, then an asset-based loan may be right for you. With an asset-based loan, you can qualify for investment property financing using your liquid assets rather than undergoing traditional income verification processes. This means that you can use checking and savings accounts, retirement accounts, investment portfolios, and more to secure an investment property mortgage.

Private Money Loans

If you don’t have good credit or you need to purchase the property very quickly, private money, also known as hard money loans, might be right for you. Common hard money loans are bridge loans or fix-and-flip loans that are based on collateral. Private money requires at least a 25% down payment with high rates and points/fees.

Refinancing an Investment Property Loan

If you already have an investment property loan but want to adjust your loan terms or take advantage of low rates, then you might consider refinancing your investment property loan. By refinancing, you can change your mortgage terms, lower your investment property mortgage rate, and even exchange your equity for cash.

When it comes to refinancing your investment property loan, you’ll have two main options:

Rate-and-term refinance

If all you’d like to achieve by refinancing is securing a lower rate or adjusting your loan term, then a standard rate-and-term refinance might be the right option for you. A rate-and-term refinance essentially means you get a fresh loan with new terms. This allows you to shorten or lengthen your mortgage term, capitalize on lower interest rates, and potentially change other aspects of your current mortgage.

A cash-out refinance

A cash-out refinance allows you to tap into the equity you’ve built up and turn it into cash. Like a rate-and-term refinance, a cash-out refinance replaces your current mortgage with a new one. However, a cash-out refinance replaces your existing mortgage with a bigger loan amount, allowing you to pay off your current loan and pocket the difference.

You can use the money you get from a cash-out refinance for whatever purpose you’d like. For example, you could use the cash to consolidate debts, fund renovation projects, expand your business, and much more.

If you use the money from a cash-out refinance to upgrade or improve your investment property, this can pay dividends in the future, as you can charge higher rents for upgraded units. Alternatively, you can use the money from a cash-out refinance as a down payment on another investment property and expand your real estate investment portfolio.

If you’re interested in refinancing a property investment loan, reach out to Griffin Funding today. We offer industry-leading expertise and a wide range of investment property financing options, from ADU loans to short-term rental loans.

Benefits of Property Investment Loans

Owning an investment property makes your money work for you. Some of the top benefits of owning an investment property include:

• Earn passive income: An investment property provides you with an additional income stream and it doesn’t necessarily have to be a full-time job. Hiring a property manager or contracting with a real estate management company can minimize the time and effort demanded of you, while still providing you with rental income.
• Benefit from home appreciation: Real estate tends to appreciate in value over the years, and that appreciation helps you build wealth. As you build equity in your investment property, you’ll benefit more and more from home appreciation.
• Diversify your portfolio: When it comes to investing, you don’t want to put all of your eggs in one basket. Real estate can help diversify your investment portfolio and hedge against risk if other investments don’t go your way.
• Hedge against inflation: Compared to other types of investments, real estate prices tend to keep pace with inflation, making an investment property a good hedge against inflation and fluctuations in the market.
• Enjoy tax benefits: In many cases, you can enjoy certain tax breaks as a result of investing in real estate. For example, you may be able to deduct things like mortgage interest, depreciation, and business expenses from your taxes.

Griffin funding is a leading investment property lender and broker. When you work with us, you get personalized assistance from extremely knowledgeable specialists who will help you secure a competitive investment property mortgage rate. We are transparent throughout the lending process and work hard to provide excellent customer service.

What States Are Investment Property Loans in?

How to Get a Loan for a Rental Property

Getting a loan for an investment property usually requires a better financial profile than a loan for a primary residence.

Based on the investment property lender you apply with, the terms of your loan will vary. Make sure that you are ready to expand into investment property by establishing financial stability so that you can secure the most favorable loan terms. Several factors can impact the terms of your loan and the investment property mortgage rate you qualify for, such as:

• The size of your down payment
• How good your credit is
• The property’s projected rental income
• The value of the property that you intend to buy
• The type of investment property loan you choose

An investment property lender like Griffin Funding can help you determine whether you qualify for a mortgage based on our own investment property loan requirements and provide you with a quote for loan terms.

To find out if you qualify for a Griffin Funding investment property loan, submit an application online or speak with one of our loan specialists today. Our 10-step loan approval process is streamlined to make it as stress-free and efficient as possible. The most important thing you can do is ensure that you’re able to provide all the documentation we need — like proof of income — with a quick turnaround.

Together, we can help you secure an investment property loan that helps you purchase or refinance a second home.

Here are some investment property loans available by state:

• Arizona Investment Property Loans
• California Investment Property Loans
• Hawaii Investment Property Loans
• Nevada Investment Property Loans
• Washington Investment Property Loans

Other Traditional Mortgage Products

Find Out If You Qualify for an Investment Property Loan

If you feel like it is time to take the next step and increase your holdings, it may be time to see if you qualify for an investment property loan. Griffin Funding is a trusted, leading lender, with a professional and customer-focused staff. We provide white-glove 5-star service, work quickly and efficiently, and pride ourselves on closing most of our purchase loans in 30 days or less.

Want to learn more about how to finance a real estate investment? Download the Griffin Gold app to explore investment property financing options and financially prepare yourself to invest in real estate. The Griffin Gold app offers a personalized financial dashboard, smart budgeting tools, private home search capabilities, and direct access to our mortgage professionals.

We can find the right loan for you whether it’s a mortgage loan for a property investment, a primary residence, or a vacation home. Request a quote today so we can get started.