Investment property loans: What you need to know

Investing in real estate may not be as passive of an investment as it’s often portrayed, and not every investment makes money: roughly 9 in 10 residential real estate investors have lost money on an investment, according to Clever Real Estate, a St. Louis-based real estate company. 

Still, the median home flip earned a 30% gross profit on a purchase price of $240,000 in the first quarter of 2024, according to property data company ATTOM. Rents also rose faster than home prices in two-thirds of the country in the first quarter, and rental returns exceeded 10% in some major markets.

Securing the right investment property loan and getting the best interest rate can make or break your success, so it’s important to know how these loans work and what your options are.

What are investment property loans?

Investment property loans make it possible to buy real estate that you aren’t going to live in. They’re the type of financing you might use to buy a run-down house to renovate and resell or vacant land to build rental property on. The goal is to make money from price appreciation, cash flow or both. 

Lenders consider this financing to be riskier than extending funds to a borrower who will use the property as their main home. Fortunately, they’re still willing to issue these loans under the right conditions. And there are a wide range of conditions that can qualify: It’s just a matter of finding the right lender and loan type for your project.

How do investment property loans work? 

There’s no single way investment property loans work because there are so many different types. 

They can be short- or long-term. They can have interest-only payments or fully amortized principal and interest payments. They can be issued to an individual, a business or a self-directed IRA. 

Financial institutions that extend investment property loans will evaluate the borrower and the property, but they’ll weigh their qualifications differently.

What are the different types of investment property loans? 

The two main categories of investment property loans are traditional and nontraditional. Traditional investment property loans emphasize the borrower’s qualifications, while nontraditional loans emphasize the property’s value. That said, the lender will still care about the property’s value with a traditional loan, and about the borrower’s qualifications with a nontraditional loan. 

You might not be able to buy an uninhabitable property as an investment with a traditional loan even if your credit score is 850 and your debt-to-income ratio (DTI) is 20%. On the other hand, a nontraditional lender that might approve a property based on its after-renovation value could still turn you down if you have no experience and a 560 credit score.

Within each category, you’ll find multiple options that may work for you, whether you’re buying your first investment property or your 10th.

Traditional

• Conventional loan: This mortgage type is widely available but requires lenders to follow precise guidelines for credit score, down payment, and DTI. A conventional loan can be a good choice if you meet those guidelines and don’t need to borrow more than the conforming loan limit. (The limit established by the Federal Housing Finance Agency for 2024 is $766,550 for a one-unit property in most areas.)
• Super conforming conventional loans: In high-cost areas, the conventional loan limit can be as high as 150% of the conforming loan limit, or $1,149,825 for a one-unit property in 2024. These loans are an option if you’re buying an investment property in San Francisco, Honolulu, Juneau, or another expensive market. 
• Jumbo loan: Jumbo loans are for financing a property that’s higher than the super conforming loan limit. Lenders, not government regulators, decide where to cap these loans, so limits can range from a million to tens of millions of dollars.
• HomeStyle Renovation Mortgage: These loans allow you to buy a one-unit investment property with at least 15% down and fix it up yourself or by using contractors. Any type of repair or renovation, including accessory dwelling units and landscaping, is allowed.
• Home equity loan, home equity line of credit, or cash-out refinance: If you have at least 20% equity in another property (like your main home) you may be able to use some of that equity to purchase your investment property.
• Personal loan: A personal loan is usually unsecured, with a term of less than 10 years. Many people will find it challenging to qualify for a large enough personal loan to buy an investment property. However, it may be an option if you have a high income and little debt, if you’re purchasing an inexpensive property, or if you only need money for renovations. 
• VA loan: If you’re a qualifying military service member, veteran, or surviving spouse, you may be able to use a VA loan as an investment property by purchasing a two- to four-unit property and living in one unit as your primary residence. You can then rent out the other units to build equity faster, a strategy some people call “house hacking.”

Nontraditional

• Debt service coverage ratio (DSCR) loan: A DSCR, also called a cash flow loan, looks at whether the property’s rental income covers its principal, interest, property taxes, and insurance costs instead of using the borrower’s income to qualify.
• Bank statement loan: This loan uses 12 to 24 months of business or personal bank statements to calculate a business owner’s income and expenses for loan qualification. The calculation can be more favorable for qualifying than business tax returns for someone with high business expenses, including high profit-sharing contributions to retirement accounts, that reduce taxable income.
• Business profit and loss statement loan: If you’re a small business owner, you may be able to qualify based on one or two years of profit and loss statements instead of other forms of income verification (like bank statements or tax returns).
• Asset qualifier or asset depletion loan: This loan qualifies investors based on their liquid assets, such as checking, savings, and brokerage accounts. Qualification can be based solely on assets, or asset qualification can supplement income qualification for someone whose DTI ratio would otherwise be too high. An asset qualifier loan can be a good choice for retired or semi-retired real estate investors.
• Self-directed IRA non-recourse loan: You can’t purchase investment property in a standard individual retirement account with a major brokerage, but you can with a self-directed IRA. The property is collateral and the lender can’t go after your personal assets, including your IRA assets, if you default. This loan may require a large down payment and ample cash flow to make loan payments.
• Rehab loan: Also called a fix-and-flip or fix-and-hold loan, this product is designed to help you buy, rehabilitate, and renovate properties that need work to maximize their value. You may need to put 10% to 25% down and complete work within 12 to 18 months. Repair funds are held in an escrow account and released gradually to make improvements.
• New construction loan: This allows you to buy land and build on it to rent or sell. The loan amount is based on the project’s potential. 
• Cross-collateralization loan: If you already own property free and clear or mostly debt-free, you may be able to use it as collateral to cover all or part of a down payment on another property. Both properties will serve as collateral for the new loan.
• Pledged asset loan: You can use stocks, bonds, mutual funds, CDs, or cash as collateral for the loan by transferring these assets to an account with the lender. You won’t have to sell the assets, and you may still be able to trade them as long as your portfolio value stays above a certain level. Once your property has enough equity, you’ll regain full access to your assets. 
• Portfolio loan: You can use this loan to finance multiple investment properties.

What are the requirements for an investment property loan?

The requirements for an investment property loan depend on the lender, loan type, loan purpose, loan amount, and property type. 

For example, if you get a conventional loan from a traditional mortgage lender to buy a four-unit house, you may need a credit score of at least 620 and 25% down. You may be able to borrow as much as $1,474,400 in 2024 in most parts of the country and up to $2,211,600 in high-cost areas.

To finance the same property through a nontraditional lender, you might use a bank statement loan that requires a credit score of at least 640 with 25% down but may allow a down payment as low as 10% with a 720 credit score. The maximum loan amount might be $3 million, regardless of location.

How do you get the best rates on investment property loans? 

A high credit score and low DTI are especially important if you’re getting a traditional investment property loan since the lender is primarily interested in your creditworthiness.

With a nontraditional loan, your investment property experience can carry more weight in getting the best rates or qualifying at all. It can also reduce how much the lender expects you to put down. Your credit score may still be important but less essential. 

Nontraditional investment property loans offer more flexible terms, making them ideal for real estate investors who need to act quickly on outside-the-box transactions. You’ll pay for this flexibility, however: Nontraditional investment property loans often have higher interest rates than traditional bank loans. But traditional bank loans still tend to have higher costs for investment properties than for owner-occupied properties.

Investment property loans FAQ

Can I get an investment property loan with bad credit?

Maybe. Traditional conventional loans require a credit score of at least 620, so look at nontraditional options where lenders may have more flexible requirements. 

For example, you may be able to get a self-directed IRA loan with no credit check if you’re buying a rental property, while some lenders may consider scores in the 500s for other types of loans. However, investment property lenders do often have minimum credit score requirements in the mid-600s and higher. 

What is the minimum down payment for an investment property loan?

To get an investment property loan, you may need to put 25% or more of your own money into the transaction. In some cases, such as a rehab loan with an after-repair value significantly higher than the purchase price and rehab costs, you may be able to put nothing down with some lenders. 

How do investment property loans differ from regular home loans?

Investment property loans can differ from regular home loans (for a primary residence that you occupy) in several ways:

• May require that no one is living in the home
• Terms as short as a few weeks or months
• Interest rates and fees may be higher
• Monthly payments may be interest-only with a balloon payment of principal when the loan term ends
• May be underwritten based primarily on the property, not the borrower
• May allow other assets, including other properties and stocks, in place of a cash down payment
• May be more flexible on property type, location and condition