How Do I Finance an Investment Property?
Financing an investment property can look different from financing the home you live in. Understanding some of those differences before you begin your property search can help you know what to expect and prepare for the purchase.
If you're planning to finance an investment property, one of your first steps should be talking with a lender about how you intend to use the property.
Whether a home will be your primary residence, second home, or investment property can affect the financing options available to you. That's why it's important to be clear about your plans from the beginning.
Quick Takeaways
Investment property financing may have different requirements than financing a primary residence.
Your intended use of the property matters.
Down payment, interest rate, credit, reserves, and other requirements can vary.
Rental income may sometimes be considered during financing, depending on the loan and borrower's circumstances.
Getting pre-approved before shopping can help you understand your purchasing options.
A lender can explain which loan programs and requirements apply to your specific situation.
Why Is Investment Property Financing Different?
Lenders evaluate investment properties differently because the borrower isn't purchasing the property as a primary residence.
Depending on the loan and your financial situation, this can affect things such as:
Down payment requirements.
Interest rates.
Credit requirements.
Cash reserve requirements.
Debt-to-income calculations.
How rental income may be considered.
Loan programs and lending requirements can change, so it's important to get current information directly from a lender rather than assuming the financing will work the same way as your home mortgage.
How Much Will I Need for a Down Payment?
There isn't one down payment requirement that applies to every investment property purchase.
The amount you may need depends on factors such as the type of loan, property, number of units, your financial qualifications, and the lender's requirements.
Instead of choosing a property based on a particular down-payment percentage you've heard about, talk with a lender early in the process. They can help you determine what may be available based on your particular situation.
Can Rental Income Help Me Qualify?
Depending on the financing and circumstances, a lender may be able to consider qualifying rental income when evaluating the loan.
However, how much income can be considered, what documentation is required, and whether the property has an existing rental history can all matter.
This is another area where your lender should guide you based on the specific property and loan program.
What Are Cash Reserves?
A lender may require an investment-property buyer to have funds remaining after closing. These funds are commonly referred to as cash reserves.
Reserve requirements can vary depending on the loan, borrower, property, and other factors.
Even when reserves aren't required in a particular situation, investment-property owners may want to consider keeping money available for unexpected repairs, vacancies, maintenance, and other ownership expenses.
Should I Get Pre-Approved Before Looking?
Yes.
Getting pre-approved before seriously shopping for an investment property can help you understand:
Your potential price range.
The funds you may need for a down payment and closing.
The type of financing that may be available.
How the anticipated payment could affect your overall investment plan.
It can also help you focus your property search on options that fit your financing.
What Should I Ask a Lender?
When speaking with a lender, make sure they know you're considering an investment property.
Questions you might ask include:
What financing options are available to me?
What down payment might I need?
What are the current qualification requirements?
Will cash reserves be required?
Can rental income be considered?
Are requirements different for a single-family home, condo, or multi-unit property?
What closing costs should I anticipate?
The answers can help you better understand your options before you make an offer.
The Bottom Line
If you only remember one thing from this article, let it be this:
Talk with a lender before you begin seriously shopping for an investment property.
Knowing how you can finance the purchase—and approximately how much cash you may need—can help you evaluate properties more realistically from the beginning.
From Dana & John
When we're helping someone look for an investment property, we want to understand the financing side early in the process.
Knowing whether you're paying cash or financing, what type of property you're considering, and what your lender has approved can help us focus the search on properties that better fit your plans.
You don't have to have every detail figured out before you call us. We're happy to help you get started and work alongside your lender as you explore your options.
Continue Learning
Considering an investment property? These guides can help you look at the numbers and understand your options before you buy.
→ Is an Investment Property Right for Me?
→ What Expenses Should I Budget for as a Rental Property Owner?
→ How Do I Estimate Cash Flow on an Investment Property?
→ What Tax Questions Should I Discuss With My CPA Before Buying an Investment
Have Questions?
If you're considering buying an investment property along Alabama's Gulf Coast, we're happy to help you explore the available properties and work alongside your lender throughout the buying process.
Dana & John Martin – Team Martin
Waters Edge Realty
318-504-9925 | 504-450-2714
ALGulfCoastAgents@gmail.com
