Investment property financing 101: Where to start

If you are getting started with real estate investment properties, or want to diversify your real estate portfolio, you might be wondering how to finance your investment property. Investment property loans finance non-owner-occupied, income-generating real estate properties (distinct from second homes, which are owner-occupied and follow different rules).

Investment properties are generally aimed at generating consistent income, which can make the financing process differ from buying a home to serve as your primary residence. Lenders often see investment properties as higher risk, some key reasons including:

• Higher default risk: If a borrower runs into financial trouble, and they stop making payments on an investment property, this can lead to foreclosure.

• Rental income uncertainty: Since investment properties often rely on tenants for income, vacancies, late rent payments, or market downturns can disrupt cash flow, making it difficult to cover the mortgage.

• Market volatility: Investment properties may be more sensitive to changes in the housing market, interest rates, and local rental demand, which can make their long-term value unpredictable. Market fluctuations can also potentially affect property taxes, further increasing the financial burden of the borrower.

• Property maintenance costs: Landlords need to take care of repairs, upkeep, and possible damage from tenants themselves. An unexpected rise in expenses can strain the borrowers' ability to repay the loan.

• Less emotional attachment: Investment properties are financial assets, unlike a primary home, so the borrower may be more willing to walk away if the property underperforms.

Due to these risks, this often results in stricter lending criteria and qualification requirements, such as higher interest rates, larger down payments, or higher credit standards.

When looking into the available financing options for investment properties, you may want to draw a distinction between single-family residences (like a house or a home with up to four units) and multifamily options (homes with five units or more). It is also important to understand what financing options are available to see which one would best fit your financial situation and goals.

When considering different financing options, it is also important to understand the pros and cons of each, to be aware of any potential risk, and to see what best fits your financial situation. You may also want to consider if the loan has fixed or variable interest, as variable rates can fluctuate with market conditions, while fixed rates remain the same during the entire loan term.

Some common investment property financing options include:

Conventional mortgages are home loans offered by private vendors that can be used to finance investment properties, but may come with higher down payment requirements, stricter credit standards, and higher interest rates compared to loans for a primary residence (typically higher than primary-residence rates, often by 0.5–1+ percentage points, depending on borrower profile and loan features)¹. This may be a consideration for single-family rentals or smaller properties.

Commercial loans are mortgages used to finance income-producing real estate. They differ from traditional mortgages, as they often have shorter loan terms, higher interest rates, and different term structures, and focus more on the property’s income-generating potential rather than the borrower’s personal finances alone.

DSCR loans are underwritten primarily to the property’s cash flow (Debt Service Coverage Ratio) rather than traditional DTI. They can simplify qualifying for investors, but usually come with higher rates/fees and larger down payments than conforming loans.

Private lenders and hard money loans offer fast access to capital, which can be useful for investors looking to move quickly on a deal or finance properties that don’t qualify for traditional loans. However, they usually carry much higher interest rates and shorter repayment terms. They may be used more for short-term projects like fix-and-flip investments.

If you have significant equity in your primary home, you may be able to use some of it to finance an investment property. Home equity loans and HELOCs often provide lower interest rates than unsecured borrowing, but they put your personal residence at risk if you fail to repay.

Instead of borrowing, some investors form partnerships or joint ventures to pool resources and share both risks and rewards. This can make it easier to access larger or more profitable opportunities, but it requires clear agreements on responsibilities, profit-sharing, and exit strategies.

Although some components and thresholds can be different, many investment property loans require the same basic elements that are often expected to qualify for a standard residential home loan. 

Here are some steps you can take to help you prepare:

In general, having a higher credit score may increase your chances of qualifying with better rates. By building and maintaining a strong credit score and keeping up with your finances, you might help your chances of securing a better rate.

Investment properties often require higher down payments than those of a primary residence. Common benchmarks are generally 15–20%, but the actual amount may vary based on your lender. Putting more down can possibly help take some risk away from the lender, since you are showing your commitment to the purchase and making your payments.

If you want to start saving for your down payment, you might want to consider options like certificates of deposit (CDs) or high-yield savings accounts to help boost your funds while you wait for the right opportunity.

Investment properties may often require a well-defined plan to convince lenders of your success. You may want to showcase your investment strategy to show your projected rental income (including expected rent amount), long-term goals for the property, or even vacancy rates. Lenders often count ~75% of market or lease rent toward qualifying to reflect vacancy/expenses. Researching your target area can help support your plan.

To help make your mortgage application process smoother, ensure you have all the necessary documentation ready. Lenders may ask you for:

• Proof of income (e.g., pay stubs) 

• Bank statements or other investment account statements 

• Tax return forms or W-2s

Having these documents ready and available can help you streamline the application process.

Before applying for a loan, consider different financing options that are available. By comparing lenders and loan terms, you can get a better insight into what rates and conditions fit better with your financial situation and plans for the property. Exploring your options can also help you weigh out the pros and cons of each, rather than just going with the first available option.

Once the lender has reviewed your finances and given you a conditional agreement to lend you a set amount of money, you are pre-approved for your mortgage. The pre-approval indicates that you likely qualify for the loan based on stricter criteria than that of a primary residence, showing the real estate agents you are a serious buyer.

Once you have received the approval for the mortgage, you are ready to move forward in completing the property’s due diligence (including the appraisal, inspection, and title search), acquiring your closing funds, and signing the paperwork and transferring ownership at a final closing meeting.

Financing an investment property takes more preparation than buying a primary home, but understanding the process and available loan types can help you feel confident as you move forward. By strengthening your finances, exploring different lenders, and preparing clear rental income strategies, you can increase your chances of approval and set yourself up for long-term investment success.

If you are ready to get started on saving towards your down payment, Raisin is here to help. The Raisin marketplace gives you access to a variety of high-yield savings products with competitive interest rates to help boost your savings. Explore account types, compare interest rates, and sign up today to start maximizing your savings potential!

While actual amounts may vary by lender, general credit score requirements can range from 620 to 680, but stronger scores (700+) may further improve your chances of approval and securing better interest rates.

Down payment amounts may also vary depending on your lender, but in general, they may fall around 15–25% (though putting more down can help reduce risk and improve loan terms).

Yes. Lenders often allow projected rental income to count toward qualification, but you may need to show leases, market rent studies, or other documentation. However, this may also vary by lender.

Yes. Lenders view investment properties as riskier, which means stricter requirements, higher interest rates, and larger down payments compared to primary home loans.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Sources

¹https://themortgagereports.com/27698/investment-property-mortgage-rates-how-much-more-will-you-pay