Investors

How do I finance an investment property?

By Steve Lockhart

The short answer

The first branch of the decision is whether you will live in the property.

Full answer

The first branch of the decision is whether you will live in the property. If you occupy one unit of a building with up to four units, owner-occupied products like FHA and some conventional programs offer the smallest down payments and best rates, with rental income from the other units helping you qualify. That is the cheapest way to get started on a small multifamily.

For a true rental you will not occupy, conventional investment loans are the standard: expect a bigger down payment, typically 15 percent minimum for a single-unit rental under government-sponsored guidelines with many lenders wanting 20 to 25 percent, 25 percent for two to four units, and rates that run a bit higher than owner-occupied loans, plus stronger credit and cash reserve requirements. DSCR loans are the alternative that has grown fast for investors: the lender underwrites the property's rental income rather than your W-2s, which helps self-employed buyers, in exchange for larger down payments, often 20 to 25 percent, and higher rates and fees.

Flipping changes the math again. Hard money lenders lend on the after-repair value with short terms, higher rates, and points, because speed and the deal matter more than your tax returns. Whatever the route, get current quotes from lenders who actually do investment loans, run the payment through your cash flow, and make sure the loan terms survive the rent and expense assumptions you built. Financing is the part of the deal that converts a good property into a good investment, or a good property into a bad one.

A note from Steve: nothing on this page is investment, legal, or tax advice. Markets move, and every property is different. Run your own numbers on the specific deal, and talk to your CPA and attorney before you commit.

Go a little deeper

Frequently asked

Questions investors often follow up on

Can I use my primary home's equity to fund a rental?

Yes, a home equity line or cash-out refinance on your residence is a common source of down payment cash for an investment property. It concentrates your exposure in real estate, so the math and your risk tolerance should both be considered.

Do lenders treat rental income differently for qualification?

Yes. For conventional loans, lenders often count a portion of projected rental income, with rules about when it can be counted, and on owner-occupied multifamily, projected rent from the other units helps qualify. DSCR loans go furthest, qualifying entirely on the property's rent.

Are interest rates higher on investment properties?

Usually slightly, because investment loans carry more risk for the lender, with adjustments on top of base rates. The exact difference changes with the market, so compare current quotes for the same loan size and credit profile.

The Lockhart Method

Your Home | My Strategy | Proven Results

My strategy: we settle the financing question before we start looking, because it decides what you can buy and what the cash flow will be. I connect you with lenders who actually do investment loans, and we stress the payment against realistic rent, vacancy, and expenses.

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