Financing for Real Estate Investment

Looking to invest in real estate? Discover financing strategies, loan types, and tips to secure funding for your investment propertySecure the best financing for your real estate investment. Compare mortgage options, private lending, and funding strategies.

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How Real Estate Financing Works

Here’s how real estate financing usually works: A buyer or investor applies for a mortgage loan from a bank or lender. The loan amount is the property’s price minus the down payment. The lender gives the loan with an interest rate, which is the percentage of the loan the borrower pays the lender each year as interest. For example, a 5% interest rate on a $100,000 loan means paying $5,000 in interest per year.

The borrower uses the loan to buy the property and starts making monthly payments. These payments cover part of the loan (called the principal) and part of the interest. Investors try to get loans where the rent they collect from the property is more than the mortgage and other costs, so they make a profit

Investment Loans vs. Owner-Occupied Loans

Financial institutions prefer lending money to so-called owner-occupiers, borrowers who plan to live in the properties they need financing. Homeowners usually get loans with lower interest rates (owner-occupied loans) than real estate investors (investment loans) loans. Investors can only qualify for owner-occupied loans if they have lived on the property for at least two years. After living there for two years, they can rent out the property and still keep the lower interest rate for the rest of the loan.

How Lenders Evaluate Borrowers

Lenders see real estate investors as riskier than regular homeowners, so they use stricter rules to evaluate them. Lenders consider several factors, including:

Income: Lenders want to be sure you have a reliable and steady flow of income available to repay your loan. They typically assess your current income and income you might receive from the new property to confirm that you’ll have enough positive cash flow to cover expenses and mortgage payments each month.
A high credit score. (above 700) shows lenders that you will likely pay your mortgage on time and in full monthly. Lenders often demand higher credit scores from investors than from owner-occupiers, so be sure your credit is top-notch before applying for an investment loan.
Experience: Lenders prefer real estate investors who know such borrowers have a history of paying back loans that lenders can examine, plus a track record of buying and managing property. Together, these factors can ease lenders’ concerns about the prospect of foreclosure, which is a typical result when amateur investors buy property they can’t afford or manage effectively. If you have no experience in real estate investing, lenders may offer you higher interest rates to hedge their risk of foreclosure.

Age: Lenders are most comfortable loaning money to borrowers in the prime of their earning years (mid-30s to mid-50s). If you don’t fall into that age group, the lender may ask to see documents showing you can repay the loan, such as recent savings or investment account statements.

Down Payment Options

Creative and risky ways to finance a property can let you buy with little or no money, but it’s best to buy a property where you can afford a 20% down payment. A 20% down payment helps you:

Build equity: You immediately own part of the property by paying a down payment. As the property’s value increases, your ownership stake grows.
Avoid mortgage insurance: If you don’t put at least 20% down, your lender will make you buy private mortgage insurance (PMI), which can add around 10% to your monthly payments.
Invest wisely: Some new investors try to buy too many properties they can’t afford, thinking they can make money by renting them out or selling quickly. This approach is risky. Only buy properties where you can afford the 20% down payment and the ongoing costs.

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