When people first consider investing in real estate, they often wonder how to get started. After all, properties are expensive. How can investors afford to purchase new properties to rent out?
The short answer is through loans for rental property investments. These loans often function like your home mortgage. Lenders follow similar application processes that require you to document your income, assets, and debt.
However, there are differences between these loans as well. In fact, there are several types of loans for rental property investors. Each of these has its advantages and disadvantages.
If this sounds confusing at first, don’t worry. We’ll explore some common types of rental property loans in the guide below.
Conventional Loans for Rental Property Investors
Conventional loans, or “conforming loans,” are common choices for rental property investors. Mortgage brokers, banks, and credit unions offer these loans to potential borrowers.
These loans require down payments of 15%-25%, depending on the property’s condition. They also offer lower interest rates and fees to lenders with a good credit score.
These loans must meet government-sponsored enterprise guidelines to remain valid. Their guarantees come from Fannie Mae or Freddie Mac, making them reliable loans.
An FHA Loan for Rental Property Investors
Another option is to receive a multi-family loan through the Federal Housing Administration (FHA). Once again, many traditional lenders provide these loans.
People usually choose these loans when they want to purchase new construction. Alternatively, they may use them for substantial property rehab projects.
They usually have lower down payment and credit score requirements than conventional loan alternatives. You can also use any existing rental income to qualify for this loan. However, they have extra rental property loan requirements.
Borrowers must reside in one of the purchased units for at least one year. This way, the risk for the lender becomes reduced. You can learn more about these rental loans in the article linked here.
Multi-Unit Financing Through the VA
You can also receive a multi-family loan through the US Department of Veterans Affairs. As with the other loans, you can receive these through traditional lenders.
The primary requirement for these loans is that you are one of the following:
- Active-duty service member
- Eligible spouse of a military member
These loans do not require minimum down payments or credit scores. You can use these loans to buy up to seven units; however, as with FHA loans, you must reside in one unit you purchase.
Home Equity Loan on Rental Property
Finally, you can use the home equity of one property as a source of funds to buy another one. This works by using that equity as a line of credit.
This loan functions as a type of second mortgage. Usually, they include a fixed rate with payments made over a period of time. Most home equity loans allow you to borrow 75%-80% of your property equity.
Find the Best Loans for Rental Property Ventures
As you can see, several loans for rental property investors exist. All that’s left is to decide which option works best for you.
First, consider whether you want to live in one of your properties. This decision can help you narrow down what types of loans to apply for.
Second, decide where to draw your funds. A home equity loan can help you find cash in an emergency, but it may not be the best option for you. Then, you can use this information to get the best property for your portfolio!
We hope you enjoyed this article and found it useful. If so, check out our other investment tips today.