The most common real estate financing options come in the form of mortgage loans. How many types of investment property mortgage loans are there? Plenty! Here are the 9 most common investment property mortgage loans used by real estate investors!
Related: Is Mortgage the Best Way to Finance Rental Property?
1.) Conventional Investment Property Mortgage Loans
By a landslide, the most common financing rental property method is through a conventional bank loan. Buying an investment property through conventional loans is possible through both big banks and local banks. Conventional loans consist of long terms, down payments of usually 20%, and low interest rates. Two of their most important requirements is having good credit and having a steady history of employment.
2.) Investment Property Mortgage Loans from Local Banks
If you’re interested in buying an investment property in a certain area, consider obtaining a mortgage from local banks. Like big banks, local banks offer conventional investment property mortgage loans. One of the differences, however, is that local banks tend to offer better deals than big banks if a real estate investor is interested in buying investment property in the local area.
3.) Owner-Occupancy Loans
Owner-occupancy loans allow investors to purchase real estate investments with less strict financial requirements and better terms. The catch is that the investment property must be occupied by the owner for the first year of purchase. After that time period, the real estate investor is free to turn the property into a rental, with no change to the original loan terms.
4.) FHA Mortgages
Federally qualified lenders can issue a certain type of owner-occupied mortgage called FHA loans. Just like standard owner-occupancy mortgages, FHA loans allow investors to purchase real estate investments and rent them out after living in them for a year. What makes FHA loans stand out, however, is their low down payments (as low as 3%!), easy credit requirements, and long terms. This makes FHA loans among the top financing options for beginning real estate investors.
Related: Can you use FHA loan for investment property financing?
5.) Lease with the Option to Buy
Like owner-occupancy loans, financing real estate investments with a lease with the option to buy allows an investor to live in a property before buying it. The difference between this form of real estate investment financing and owner-occupancy is that the investor rents out the property; it is not a primary residence. A lease with the option to buy is when a real estate investor (tenant) reaches an agreement with a landlord who is looking to sell the property. Portions of the paid rent go towards the final purchase, and there is a deadline set between the two parties. Leasing with the option to buy is one of the best financing options to reduce down payments, which are determined by the agreement between the tenant and landlord.
6.) Hard Money Investment Property Mortgage Lenders
If you plan to begin financing rental property quickly, hard money loans might be for you. These investment property mortgage lenders can provide loans within a matter of days. Instead of credit requirements, hard money lenders will be more interested in the fair market value of your real estate investments.
Hard money investment property mortgage loans might sound like a stress-free real estate investment financing method, but they are far from that. These loans carry considerable risk. For instance, hard money loans have very short terms, which usually last up to 36 months. It is virtually impossible to pay off a real estate property in merely 3 years. For this reason, hard money loans are best used for investments that are quickly bought and sold, like fix-and-flips. The second risk with hard money loans is that they have high interest rates, much higher than the average.
7.) Private Money Investment Property Mortgage Lenders
Private money investment property mortgage loans are the less risky counterpart of hard money loans. This real estate investment financing method is also a short-term loan, like hard money loans, but the terms can be negotiable.
Interest rates are still higher than the average when financing rental property with these loans, but they are still lower than those of hard money loans. It’s most suitable to use high interest loans when you are sure that the investment property you’re buying will generate high rental income. How exactly can you find that out? Not with a magic crystal ball, but with Mashvisor’s investment property calculator!
8.) Home Equity Investment Property Mortgage Loans
If you are buying an investment property but own a primary residence or investment property, you could decide not to finance the new property with money. Instead, you could use the equity of one of your real estate properties to finance the loan. Home equity investment property mortgage loans allow real estate investors to borrow up to 80% of a property’s equity for financing rental property.
Related: What You Need to Know About Real Estate Equity
9.) Purchase-Money Mortgage
A purchase-money mortgage, also known as owner financing or seller financing, is a real estate investment financing method in which a property seller issues a loan to the property buyer. Essentially, the seller acts as a bank lender, and the buyer pays monthly payments to the seller.
Purchase-money investment property mortgage loans might seem like a strange method of financing rental property, but they come with their benefits to both parties involved. A buyer who does not meet the standards of conventional financing options could acquire such a mortgage. The property seller receives higher interest payments, which means that anyone interested in such a financing method must ensure the investment property will generate high rental income.
To Wrap It All Up
Financing options in real estate investing come in various types of methods. The most common of these are investment property mortgage loans. Mortgage loans themselves break down into many different types, each with unique advantages and disadvantages. Whenever you are considering buying an investment property, see which method gives you the most benefits and the fewer risks. This, of course, will depend on a case-to-case situation. For more on everything related to investment property mortgage loans and real estate investing, be sure to visit us at Mashvisor!