Real estate has consistently been one of Americans’ favorite ways to invest. According to an annual Gallup poll, more Americans named real estate the best long-term investment than stocks and gold.
But it’s no secret that real estate can be expensive, and many people can’t afford to buy investment properties out of pocket. Luckily, there are plenty of ways to finance an investment property, including utilizing traditional lending and assets you already own.
- An investment property is a piece of real estate purchased with the goal of earning a return on investment in the form of a capital gain or monthly cash flow.
- Conventional loans often used for primary residences are also available for investment properties, although down-payment and reserve requirements may be higher.
- For investors planning to buy and flip a property, a short-term fix-and-flip loan can offer larger loan-to-value amounts and more flexible repayment.
- If you already own property, you can borrow against your existing equity to finance a new property, allowing you to leverage your existing assets and possibly get a lower interest rate.
What Is an Investment Property?
An investment property is a piece of real estate purchased to provide a return on investment or a source of income for the buyer. Popular investment properties include single-family homes and multi-family homes such as duplexes and apartment buildings.
Investment properties are generally profitable because of the monthly cash flow they often provide. If you buy an investment property and rent it out to a tenant, your profit is the monthly rent above and beyond what it costs to own and maintain the home. An investment property can also provide a capital gain if it appreciates while you own it.
The difference between an investment property and a primary or secondary residence is that a primary residence is one where you live most of the year, and it generally doesn’t provide a source of monthly cash flow. In the case of a multi-family unit, a property may serve as both an investment property and the investor’s primary residence.
Investment properties also differ from primary residences when it comes to lending requirements. While you can often buy a home with as little as just a few percent down (or even 0% for some specialty loans), investment properties often require down payments of closer to 15-20% and larger cash reserves.
Conventional Bank Loans
Similar to conventional mortgages for primary residences, lenders also offer conventional loans for investment properties. These loans have many of the same requirements as other conventional loans, set by Fannie Mae and Freddie Mac.
One of the most significant differences between investment and primary-residence loans is that you’ll likely need a larger down payment. Primary residences can often be purchased with as little as 3% down. Fannie Mae-backed loans for investment properties typically require 15% down for single-family units and up to 30% down for multi-family units, depending on the loan type.
Another difference is the income that’s used to qualify for a conventional loan on an investment property. Just like when you purchase your primary residence, you can use your personal debt-to-income ratio to qualify for a mortgage. But in the case of investment properties, you can also use your expected future rental income to qualify.
A fix-and-flip loan is designed for real estate investors who plan to renovate and resell a property quickly. An investor who flips homes has very different needs than one who buys a property to rent out for many years, and so the loan they might need is also different.