What Is an Investment Property Loan?

An investment property loan is money you borrow to buy or build a property that has the potential to produce income for you by leasing the space out to a tenant, or by re-selling it after you increase its value.

Investment property loans include construction, purchase, and rehab. Investment property loans are not just for single-family homes. If you want to buy an apartment building or an office tower, you would use an investment property loan.

What Are the Most Common Investment Property Loans?

Investors try to use a conventional mortgage to buy a property with one to four units if they can meet the bank’s criteria because this is where they’ll find the lowest rates and fees.

To buy a home to renovate and resell or lease, investors often turn to private lenders that specialize in this process. Many banks either won’t provide these loans or take too long to close for an investor’s preference, so private money lenders are successful here.

Private and hard money lenders are also helpful when investors want to buy commercial properties like apartment complexes, medical office buildings, or office towers for example. Their terms are more flexible than conventional mortgages and they will work with borrowers who have lower credit scores where banks and credit unions may not.

Is It Hard to Get a Loan for an Investment Property?

Qualifying for an investment property loan is more challenging because lenders view investment properties as a greater risk. Lenders will want to make sure that you earn enough to afford monthly mortgage payments in the worst-case scenario, such as your tenant stops making their payments.

Compared to loans for your personal residence where you may qualify for a 0% or 3% down program, lenders want to see a larger down payment on investment properties, often between 20% to 35%.

To get the best rates and terms, you’ll want to get a traditional mortgage, which is why most of our winners here have come from that sector. However, you can max out at four conventional loans for investment properties. If you want to keep going, you’ll need to convert to private and hard money lenders

Can I Get an SBA Loan for Rental Property?

The SBA 504 loan is the best choice for buying commercial property. Money can be used to buy a building, finance ground-up construction, or rehab an existing building. With the SBA 504 loan, you are likely to have the lowest interest rates and a 25-year repayment term.

The application process is lengthy and usually takes 30 to 45 days to close. Borrowing limits range from $500,000 to $5 million. Key requirements of this loan include the owner must occupy 51% of an existing building or 60% of a new construction building.

How We Chose the Best Investment Property Loans

We reviewed 19 lenders and their loan programs before selecting our award winners. We considered the types of investment property loans they underwrite, down payment requirements, the interest rates and APRs, minimum and maximum funding limits, and the lender’s underwriting process complexity.

source: https://www.investopedia.com/best-investment-property-loans-5079478