Investing in real estate offers a great way to build wealth, but finding the right financing is crucial. Whether purchasing a single-family rental or a multi-unit property, knowing how to finance an investment property is essential for making informed decisions. 

Different types of residential investment property loans cater to unique circumstances, from government-backed options to loans with no down payment. For investors, understanding fix and flip loan terms is crucial when considering short-term projects. 

Here are the most common types of residential investment property loans to consider.

Conventional Investment Property Loans

Conventional investment property loans, offered by banks, provide long-term financing but require higher credit scores and larger down payments. Ideal for experienced investors, these non-government-backed loans offer straightforward terms for investment properties.

Key Features

• Down payment: Usually 20% or more for investment properties.
• Loan term: Commonly 15 to 30 years.
• Credit score requirements: Minimum around 620, higher preferred.

Pros/Cons:

Conventional loans offer higher limits and longer terms but require large down payments and strong credit scores. Ideal for seasoned investors meeting rental property loan requirements and seeking stable financing options.

FHA Loans for Investment Properties

FHA loans, typically for first-time buyers, can finance investment properties if the borrower lives in one unit. Backed by the Federal Housing Administration, these loans offer low down payments and are accessible to those with lower credit scores. 

Key Features

• Down payment: As low as 3.5%.
• Credit score requirements: 580 or higher.
• Occupancy: Must live in one unit for at least one year.

Pros/Cons:

FHA loans help first-time buyers enter real estate investing but require living in one unit. They are ideal for those seeking to finance their first multi-family property with minimal upfront costs, though it limits their full investment potential.

VA Loans (For Veterans)

VA loans provide veterans and active-duty service members with favorable terms, often requiring no down payment and offering low interest rates. Ideal for purchasing multi-unit properties.

Key Features

• Interest rates: Competitive, often lower than conventional loans.
• Occupancy: The owner must live in one unit.
• No PMI: Private mortgage insurance is not required.

Pros/Cons:

VA loans offer significant advantages, including no down payment and no PMI, but they are only available to veterans and service members. They are ideal for those who want to invest in multi-family properties while minimizing upfront costs.

Portfolio Loans

Portfolio loans are non-traditional, flexible loans retained by the lender, offering customized terms for unique investor needs. Unlike conventional loans, they aren’t sold to secondary markets, making them ideal for financing non-standard properties and complex projects.

Key Features

• Customized terms: Tailored to the borrower’s situation.
• Higher interest rates: Typically higher than conventional loans.
• Property variety: Can finance unique or complex properties.

Pros/Cons:

Portfolio loans are flexible and accessible to those with complex situations, but they tend to have higher interest rates. These loans are best for investors with non-traditional properties or those who need a custom financing solution.

Hard Money Loans

Hard money loans provide fast, short-term financing based on property value, not credit. Commonly used for fix-and-flip projects, they offer quick funding, making them ideal for real estate investors needing immediate cash flow for short-term projects.

Key Features

• Fast approval: Loans can be approved in days.
• Short terms: Usually 6 to 36 months.
• High interest rates: Ranges between 8% and 15%.

Pros/Cons:

Hard money loans provide fast, accessible funds for investors, but at the cost of higher interest rates and fees. These loans are best for short-term projects, where quick cash flow is necessary to complete renovations.

Private Money Loans

Private money loans, offered by individuals or small groups, provide flexible financing for investors who don’t qualify for conventional loans. These loans offer faster approval and customized terms, as private lenders finance projects in exchange for interest.

Key Features

• Flexible terms: Negotiable between lender and borrower.
• Higher interest rates: Generally higher than traditional loans.
• Collateral-based: Secured by the property.

Pros/Cons:

Private money loans offer flexibility and fast approval but typically come with higher interest rates. These loans are best for investors who need quick funding and have access to private lenders willing to invest in their projects.

Home Equity Loans and HELOCs

Home equity loans and HELOCs allow property owners to use home equity as collateral for new investments. Ideal for those with significant equity, they provide lump-sum loans or revolving credit to fund additional real estate projects.

Key Features

• Equity-based: Tied to the value of the borrower’s existing home.
• Lower interest rates: Due to being secured by real estate.
• Flexible use: Funds can be used for any purpose.

Pros/Cons:

Home equity loans and HELOCs provide low-cost funding but put the borrower’s home at risk. They are best for investors with significant equity who want to leverage their assets for additional real estate financing.

Commercial Real Estate Loans (For Multi-Unit Properties)

Commercial real estate loans fund large properties with five or more units. They require stricter qualifications than residential loans and are tailored to investors’ needs, providing financing for purchasing or refinancing multi-family or mixed-use buildings.

Key Features

• Higher loan amounts: Suitable for large, multi-unit properties.
• Interest rates: Competitive, based on the property’s income potential.
• Down payment: Usually 25% or more.

Pros/Cons:

Commercial loans offer higher loan limits and flexibility for large projects but come with more stringent requirements. These loans are best for seasoned investors looking to acquire or develop large multi-unit properties.

Comparing Loan Types: Which is Right for You

Deciding for the right loan depends on your investment strategy, finances, and property type. For buy-and-hold rentals, a conventional loan is ideal, while hard money or private loans suit fix-and-flip projects. Consider your down payment, credit score, and goals when evaluating types of residential investment property loans.

Tips for Securing the Best Loan

Finding the right loan takes preparation and knowledge. Follow these tips to improve your chances:

• Improve your credit score to 700+ for better interest rates and terms.
• Save at least 20% down payment to reduce costs and improve approval.
• Compare and choose the best fix and flip lenders to find the best rates and terms.
• Organize tax returns, income, and property details to speed up loan approval.

Conclusion

Choosing the right loan is crucial for real estate investment success. Your financial situation, credit score, and goals will determine which types of residential investment property loans suit you. 

Whether long-term financing or fix and flip funding: beyond the loan, research thoroughly, compare options, and consult professionals before deciding to ensure the best outcome.