How to Finance an Investment Property

Option 1: Conventional Bank Loans

Conventional bank loans are traditional mortgage loans offered by banks or financial institutions. To secure a conventional bank loan for an investment property, borrowers must meet specific eligibility criteria. These criteria typically include:



1. Credit score: A good credit score is essential to qualify for a conventional loan. Generally, a score of 620 or higher is required, although some lenders may have stricter requirements.
2. Debt-to-income ratio: Lenders analyze the borrower's debt-to-income ratio, which compares the monthly debt obligations to the borrower's income. A lower ratio is preferred, typically around 43% or lower.
3. Down payment: Conventional loans usually require a higher down payment compared to government-backed loans. It is common to put down 20% of the property's purchase price, although some lenders may accept a lower percentage.
4. Property requirements: The property being financed must meet certain standards set by the lender, including factors such as condition, location, and appraisal value.

Advantages of Conventional Bank Loans:

• Competitive interest rates: Conventional bank loans often offer lower interest rates compared to alternative financing options, making them attractive for long-term investments.
• Flexibility: These loans provide more flexibility in terms of property types, loan amounts, and repayment terms.
• No mortgage insurance premiums: If you provide a down payment of 20% or more, conventional loans generally do not require private mortgage insurance (PMI), which can save you money over time.
• Potential for higher loan amounts: Conventional bank loans may offer higher loan limits compared to other types of financing, allowing you to invest in properties with higher price tags.

Disadvantages of Conventional Bank Loans:

• Stricter eligibility criteria.
• Lengthy approval process.
• Property standards.
• Risk of foreclosure.

Option 2: Hard Money Loans

Hard money loans are a type of short-term financing typically used by real estate investors to purchase or renovate properties. These loans are secured by the property itself, making them attractive to borrowers with less-than-perfect credit or those in need of quick funding. 

Unlike traditional bank loans, hard money loans are typically provided by private individuals or investors, known as hard money lenders. To qualify for a hard money loan, borrowers typically need to meet the following eligibility criteria:



1. Collateral property: The primary focus of hard money lenders is the value and potential of the collateral property. Investors need to provide details about the property, including its location, condition, and estimated value after renovation (if applicable).
2. Equity or down payment: Hard money lenders often require borrowers to have a significant amount of equity or down payment in the property. This demonstrates the investor's commitment to the investment project and mitigates the lender's risk.
3. Exit strategy: Hard money lenders typically require borrowers to have a clear exit strategy, outlining how they plan to repay the loan. This could involve selling the property, refinancing with a traditional lender, or securing long-term financing.

Advantages of Hard Money Loans:

• Quick approval and funding: Unlike traditional bank loans, which can involve lengthy paperwork and extensive credit checks, hard money lenders focus primarily on the value and potential of the property being purchased or renovated. This streamlined process allows investors to secure funding swiftly.
• Flexibility: Hard money lenders are often more flexible than traditional lenders in terms of loan terms and conditions. They can tailor the loan structure to meet the specific needs of the borrower and the investment project. This flexibility can be beneficial for investors who require customized repayment schedules or unique financing arrangements.
• Credit history is less important: Hard money loans are accessible to borrowers with less-than-perfect credit or those who may have been rejected by traditional lenders due to credit issues. Instead of relying solely on credit scores, hard money lenders prioritize the value of the property and the investor's equity in it.

Disadvantages of Hard Money Loans:

• Higher interest rates and fees.
• Short-term and balloon payments.

Option 3: Private Money Loans

Private money loans are similar to hard money loans in that they are typically provided by private individuals or investors. However, private money loans are often even more flexible than hard money loans, and they may be available to borrowers with less-than-perfect credit.

To qualify for private money loans, you may require:

1. Credit score: Private money lenders typically require a credit score of at least 650, but some may be willing to lend to borrowers with lower credit scores.
2. Debt-to-income ratio: Private money lenders will also consider the borrower's debt-to-income ratio, but they may be more lenient than traditional lenders.
3. Down payment: Private money lenders may require a down payment, but they may be willing to lend to borrowers with no down payment.
4. Property: The property being financed must meet certain standards set by the lender, including factors such as condition, location, and appraisal value.

Advantages of Private Money Loans:

• Flexibility: Private money lenders are often more flexible than traditional lenders in terms of loan terms and conditions. They can tailor the loan structure to meet the specific needs of the borrower and the investment project. This flexibility can be great for investors who need customized repayment schedules or unique financing arrangements.
• Access to borrowers with less-than-perfect credit: Private money lenders may be more willing to lend to borrowers with less-than-perfect credit than traditional lenders. This is because private money lenders are often more focused on the value of the collateral property than the borrower's credit history.
• Potential for lower interest rates: Private money lenders may be able to offer lower interest rates than hard money lenders. This is because private money lenders are not subject to the same lending restrictions as banks and other financial institutions.

Disadvantages of Private Money Loans

• Difficult to qualify for. 
• Higher interest rates and fees.
• Lack of transparency.

Option 4: Tapping Home Equity

Tapping home equity is a way to finance an investment property by using the equity in your home as collateral. This can be a good option if you have good credit and a significant amount of equity in your home.

To qualify for tapping home equity, you may require the following:

1. Credit score: Home equity loans and HELOCs typically require a credit score of at least 620, but some lenders may be willing to lend to borrowers with lower credit scores.
2. Debt-to-income ratio: Home equity loans and HELOCs will also consider the borrower's debt-to-income ratio, but they may be more lenient than traditional lenders.
3. Equity: You must have a significant amount of equity in your home to qualify for a home equity loan or HELOC. The amount of equity you need will vary depending on the lender.

In addition to these general eligibility criteria, private money lenders and lenders who offer home equity loans and HELOCs may have other requirements, such as:

• Minimum income: Some lenders may require a minimum income level to qualify for a loan.
• Job stability: Some lenders may require borrowers to have a stable job history.
• Collateral: Some lenders may require borrowers to provide additional collateral, such as a car or investment property.

Advantages of Tapping Home Equity:

• Quick and easy approval: Home equity loans and HELOCs are often easier to qualify for than other types of financing, such as conventional bank loans. This is because the lender already has a lien on your home, which makes them less risky.
• Flexibility: Home equity loans and HELOCs offer a lot of flexibility in terms of how you use the money. You can use it to purchase an investment property, renovate an existing property, or consolidate debt.
• Tax benefits: You may be able to deduct the interest on your home equity loan or HELOC on your taxes.

Disadvantages of Tapping Home Equity:

• Risk of foreclosure.
• Increased monthly payments.
• Early repayment penalties.

In Conclusion

There are many different financing options available for investment properties. The best option for you will depend on your individual circumstances and investment goals. If you are considering investing in real estate, you should speak with a qualified real estate professional to discuss your options. 

Savvy investors partner with a property management company. Dawson Property Management can help you find the right financing solution for your needs. Contact us today to learn more!