Land is a finite resource, and there will always be a need for places to live, work, and shop. Also, unlike some investments that can disappear overnight, a property is a physical asset that generally increases in value. 

That’s why investors have used real estate to build wealth for centuries. This investment also remains popular because you benefit from its value going up, and if you rent it out, you get a steady income stream. 

However, the anticipated benefits aside, entering the real estate market is heavy on your pocket. These investments require capital for down payments, closing, and renovations. And that’s why you need a clear financial plan to stay and thrive in this field. 

Luckily, real estate investment loans can support your ambition and make difficult things possible. This guide explains how different loans are structured so you can choose the one that best matches your investment goals. 

Keep reading to make the maximum return on your real estate investments.

Commercial Real Estate Financing

Commercial real estate financing is the primary tool investors use to acquire business properties, such as apartment complexes and office buildings. 

This loan is based on the property’s cash-generating capacity, not on your personal finances (as with a standard mortgage). 

It’s worth mentioning that these are long-term loans, and the repayment period can easily be between 10 and 30 years. First, you’ll provide a down payment for the property you wish to purchase (which can be 20%-30%), and then the lender will cover the rest. A lender may check your property’s Debt Service Coverage Ratio (DSCR) to assess if the monthly rent is significantly higher than the loan payment. This structure protects both the lender and the investor by ensuring the asset can cover its own costs.

Notably, these real estate investment loans are best for scaling portfolios into high-value assets. They allow you to access high loan amounts, and since the debt is tied to a business entity, it can protect your personal credit. 

However, the application process for commercial real estate (CRE) financing is rigorous and requires detailed financial proof of the property’s performance. You’ll be required to provide solid evidence that the building will maintain an income stream to secure the best rates.

Conventional Investment Loans 

Conventional investment loans are standard mortgages from banks or credit unions and are not government-backed. Since the bank takes all the risk in this structure, there are stricter rules. For example, you will be required to have a strong credit score or make a huge down payment to prove your financial credibility. 

After you make a down payment of 20% to 25% of the property price, the investor may choose a 30-year fixed-rate mortgage. This rule will keep your monthly payment the same for the life of the loan, which is why these loans work best for long-term rental properties. 

You receive the lowest available interest rates, keep more of the rent as profit to build steady wealth over time. But before opting for a conventional loan, know that banks require a lot of paperwork, like tax returns and bank statements. 

Residential Investment Loans

Residential investment property loans help you purchase or refinance non-owner-occupied properties. If your goal is to buy real estate strictly to generate rental income or capital gains, this financing solution is for you. 

This loan’s approval process also does not center on your personal salary, and lenders evaluate the property as a business asset. Also, it’s often structured based on your business’s Debt Service Coverage Ratio (DSCR). 

DSCR is a formula lenders use to compare the property’s gross rental income to its annual debt obligations. Any property needs a ratio of 1.2 or higher to qualify, which essentially means that it earns 20% more than the cost of the mortgage, taxes, and insurance. 

When you want to scale your real estate investment portfolio without the restrictions of traditional banking, this model helps. It allows you to acquire multiple properties simultaneously because your personal income does not limit your borrowing power. 

But there’s a caveat: a residential investment loan will likely come with higher interest and more fees. You pay for the convenience of a loan that ignores your personal financial history in favor of the property’s potential.

Bridge Loans

Bridge loans are short-term tools that provide immediate cash flow during a transition period. They bridge the gap between purchasing a new property and securing long-term funding. Such real estate investment loans are for investors who need to move quickly on a high-value opportunity but do not have the primary capital ready. 

As these loans are temporary, they are based more on the property’s value than on the borrower’s long-term financial profile. A bridge loan’s structure is 

A bridge loan is short-term focused and typically lasts six months to three years. Moreover, unlike standard mortgages, where you pay back both the interest and the principal every month, bridge loans are mostly structured with interest-only payments. 

It means your monthly costs stay low while you hold the property. Then, at the end of the loan term, you pay the full principal balance in one balloon payment. If you’re waiting for a current property to sell or for a renovation to finish and need financing in between, a bridge loan will work well. But again, be wary of the high interest rates because convenience comes at a price. 

Fix and Flip Loans

Fix and flip loans are short-term funds to let you buy and repair distressed properties. If an investor plans to renovate a house and sell it quickly for a profit, they can qualify for this financing solution. 

These loans account for the fact that the property is in poor condition and you need cash to increase its value in a short amount of time. Notably, a fix-and-flip loan’s structure often covers both the purchase price and the cost of repairs. 

Lenders may base the loan amount on the After Repair Value (ARV), which is the estimated price the property will sell for once all renovations are complete. Once approved for this funding, you make interest-only payments during the project to keep your monthly costs low and pay the full balance upon sale.

Conclusion 

Financing drives every successful real estate empire, and while lending can feel like a maze, it shouldn’t stand in the way of your growth. ROK Financial is here to clear the path because we provide flexible funding solutions that make sense for your business. 

Whether you are closing your first deal or scaling a massive portfolio, we prioritize clarity so you can move with confidence. Don’t let funding hold you back; partner with experts who want to see your vision become a reality.

FAQs

Can I use one property as collateral to buy another?

Yes, you can use the equity in an existing property to secure a loan for a new one, and it is called cross-collateralization. But know that defaulting puts both properties at risk.

What if I want to sell the property before the loan term ends?

You may incur a prepayment penalty, as lenders charge this fee to recoup lost interest. The cost is a percentage of the balance or a set number of months’ interest.

Is it better to hold a real estate loan in my personal name or an LLC?

An LLC is usually better for investors because it protects their personal assets from lawsuits or debts related to the property.