When you’re getting started in real estate investing, one of the biggest challenges is figuring out how to finance your first rental property.
Luckily, there are several options available depending on your financial situation, credit score, and the type of property you want to buy.
Understanding the pros and cons of each financing method can help you make an informed decision that fits your investing strategy.
Here are some of the most common ways to finance a rental property with links to ultimate guides for each one for more detail:
- Conventional Financing – Conventional loans are one of the most common options for investors. These loans follow Fannie Mae and Freddie Mac guidelines, typically requiring a 20% down payment for investment properties. They offer competitive interest rates, but stricter qualifications compared to other loan types.
- FHA Loans – FHA (Federal Housing Administration) loans are government-backed and designed for owner-occupants, but you can use them for small multi-family properties if you live in one of the units. They require a smaller down payment (as low as 3.5%), but you’ll pay mortgage insurance for the life of the loan if your down payment is under 10%.
- VA Loans – Available to veterans and active-duty military, VA loans offer 100% financing, meaning no down payment is required. You can use these loans for multi-family properties, but you must live in one unit. VA loans also do not require private mortgage insurance (PMI), which makes them a cost-effective choice for those who qualify.
- USDA Loans – USDA loans are a zero-down payment option for buyers purchasing homes in rural areas. While primarily for owner-occupants, they can be useful for Nomad™ investors who start by living in the property. The catch is that the home must be in an eligible rural area, and there are income limits.
- Portfolio Loans – These are loans from smaller banks or credit unions that don’t sell their loans to larger institutions. Portfolio lenders keep the loans on their books, so they can be more flexible with terms. They are a great option if you have maxed out your conventional loans or need more tailored terms for unique properties.
- Private Money Loans – Private money loans come from individuals rather than banks. These can include friends, family, or other investors looking for a return on their money. They often offer more flexibility in terms and interest rates, but they rely heavily on the relationship between the borrower and lender.
- Hard Money Loans – Hard money loans are short-term, high-interest loans primarily used for fix-and-flip projects. Lenders focus on the value of the property rather than the borrower’s credit. These loans can close quickly but are expensive, so they are best for short-term projects where you have a clear exit strategy.
- Lines of Credit – Lines of credit, like Home Equity Lines of Credit (HELOCs), allow you to borrow against the equity in a property. They offer a flexible, revolving line of credit that you can draw from as needed, making them useful for property improvements or even down payments.
- Commercial Financing – Commercial loans are used for larger properties, typically five units or more, or mixed-use buildings. These loans focus more on the income-generating potential of the property than on your personal financials. They usually require larger down payments and have different underwriting standards than residential loans.
- Creative Financing – This includes strategies like owner financing, subject-to deals, or lease options. Creative financing often involves direct negotiations with the seller, allowing you to acquire properties with little to no money down. These deals can be complex but offer flexibility when traditional financing isn’t an option.
Each financing option comes with its own set of rules and requirements, so consider your long-term goals and how each option will impact your cash flow and growth as a real estate investor.