Real Estate Investment Loan Options

There are a variety of loan options for real estate investors. Conventional loans and HELOCs are available from local lenders and mortgage brokers. These are often geared to buy and hold rental properties. They require borrowers to occupy the property for a period of time each year and meet a strict debt-to-income ratio.

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1. Home Equity Loan

Home equity loans are secured loans that allow homeowners to borrow a lump sum amount using the difference between their property’s value and mortgage balance. This is an ideal funding solution if you have a clear idea of what you plan to do with the funds, such as a major renovation or debt consolidation. However, if you are planning to use the funds for ongoing expenses, a more flexible financing option like a HELOC might make more sense.

Most lenders require borrowers to have a strong employment history, stable income and low debt-to-income ratio before offering a home equity loan. You may also need to have a credit score above 700 to qualify for a competitive rate.

You can access the equity you have built up in your home through a line of credit, a home equity loan or cash-out refinance. However, you must be aware that your equity may drop as you pay down your mortgage, which can be a challenge for investors who plan to turn their properties into short or long-term rentals.

Navy Federal offers a Fixed-Rate Equity Loan1, which allows you to borrow up to 85% of your equity at a fixed rate with set monthly payments. We will cover all of the closing costs2 for new Fixed-Rate Equity Loan applications dated on or after June 1, 2023.

2. Hard Money Loan

Real estate investors who are looking for a more flexible financing option might consider hard money loans for their next investment project. These loans are typically used for short-term investments, such as fix-and-flips and construction, and are based on the value of the property. They may also have more flexible terms, such as no prepayment penalties and shorter repayment periods. However, these loans come with their own set of risks, including higher interest rates and a potential for a loss if the loan is not repaid according to its terms.

While traditional mortgages can be time-consuming to obtain, hard money loans can sometimes be funded in as little as a week. This can be beneficial for investors who are competing with other buyers for a property and need to close quickly. Additionally, many hard money lenders are local and familiar with real estate market trends. This can make them more flexible and responsive to the needs of their customers than national lenders.

When choosing a hard money lender for your next real estate investment, be sure to choose one with a solid reputation. Ask other members of your real estate investing network for recommendations, and check out online reviews and third-party websites. Look for a lender who offers flexible lending terms and doesn’t charge high origination fees.

3. Term Loan

If you already own your own property and want to buy another one as an investment, a mortgage loan might be the best financing solution for you. However, you should make sure that your income from the second property can cover both the monthly loan repayments as well as your own personal expenses. Otherwise, you could be forced to abandon your primary home if you can’t keep your second home rented for long enough to meet your debt obligations.

Other types of real estate investment loans are a bit more difficult to obtain because they carry a higher risk than residential mortgages. These are investment properties bought for purposes other than the borrower’s own living accommodations, like Airbnb rental property or commercial office space. As a result, lenders often have more strict requirements for these types of loans, such as requiring a minimum credit score and an investment strategy that makes the property profitable to your lender.

Financing plays an important role in most measures of return on real estate investments, so it’s crucial for investors to understand all the different loan options available to them. Conventional mortgages are the most common option for residential investment properties and offer standardized terms. However, hard money lenders and jumbo loans can be more suitable for high-value investment properties with unique financing needs.

4. Line of Credit

There are also line of credit loans that are similar to personal lines of credit, but are backed by real estate instead. These can be a great option for some investors, especially if they are not ready to purchase a long term or short-term rental property yet. They can be used for a variety of purposes, including paying for repairs or remodeling that will take place over the course of several months. The interest on the loan may be deductible, so talk to your tax professional before using this financing method.

The most common form of financing for investment properties is a conventional mortgage loan. This is typically available from a large national or local bank, and follows similar guidelines as a mortgage for your primary residence. It can be used to purchase a long term or short-term investment property, as well as some flips and other development projects.

Other types of loans for investment properties include hard money fix-and-flip loans and accessing the cash value of your life insurance policy. While these options have higher interest rates than other types of lending, they can be helpful for investors who are looking to quickly purchase and resell a property. Understanding the different types of loan financing available for investment properties is essential for maximizing your profit margins.