Investment property loans: What are they and what are your options?

Do you have dreams of renovating homes before flipping them for profits? Maybe you’re looking to make consistent passive income through a long-term rental or by providing homey lodgings for vacationers. Investment property loans could be the key to realizing your vision.

What is an investment property loan?

An investment property loan finances the purchase of income-producing properties. Often, these properties are aimed at generating consistent rental income. Another class of real estate investor buys houses to renovate them, hoping to fetch a higher price through the upgrades and profit handsomely. While Rocket Mortgage^® offers loans for rental properties, we don’t finance properties intended to be rehabbed or torn down.

Investment property loan basics

Investment property loans deal with properties that aren’t occupied by the owner. Because of this, you typically face stricter requirements like needing bigger down payments, higher credit scores and the ability to cover more months of mortgage payments if you lose income – reserves. To restrict our discussion of investment property financing to just these would be leaving out a significant segment occupied by the everyday investor.

Many people aren’t trying to start a real estate empire. Rather, they’re occupying one unit of a multiunit home. The other units are occupied by renters. This allows them to make the mortgage payment, plus a little extra. The guidelines for a primary residence apply, allowing for greater flexibility as to the down payment, credit score and assets necessary to make a purchase.

What are types of loans for investment properties?

When getting into the loan options available, it’s important to draw a distinction between single-family residences and multifamily options. Technically, single-family homes can have up to four units. Multifamily or commercial financing is an option once you get up to five units or more. There are options for mom-and-pop investors and aspiring real estate magnates. Rocket Mortgage only does single-family residential loans.

Home equity loans

Home equity loans are a method of accessing your home equity through a second mortgage so that you can keep an existing low interest rate while still taking advantage of your home value to fund other investment ambitions. They may also give you more borrowing power than a cash-out refi. The Home Equity Loans offered by Rocket Mortgage are based on fixed rates.¹

Home equity line of credit (HELOC)

A HELOC is a second lien that turns your home equity into a credit line. At first, you only have to make interest payments on the funds drawn. You can put funds back and reuse them during the draw period. During the repayment period, the balance freezes and principal and interest are paid for the remainder of the term. Unlike home equity loans, HELOCs have variable rates and aren’t offered by Rocket Mortgage.

Cash-out refinance

A cash-out refinance allows you to access your home equity like a home equity loan or HELOC, but you do so by taking a bigger balance on your primary mortgage. The interest rate is lower than the other two options and you have a single monthly payment. Whether this option makes sense over the other two is a math problem. A Home Loan Expert can help you with a blended rate calculation to see which would save you the most money.

Conventional loans

When it comes to conventional loans, there are both single-family and multifamily loan options. On the single-family side, those with at least a 620 qualifying credit score and 5% down payment can buy a home as long as one of the units is owner occupied. Rental properties start at 15% down for a single unit and go up depending on your goals and the number of units.

Both Fannie Mae and Freddie Mac also have robust commercial offerings for those looking to finance five units or more. You can expect more stringent qualification requirements and the lender asking for business documentation in the underwriting process.

Government-backed loans

Government-backed loans are available from the FHA and VA. VA loans are limited to eligible active-duty service members, reservists, National Guard personnel, veterans and qualified surviving spouses. Limited to primary residences, they allow you to buy a home of up to four units with 0% down if you have a credit score of 620 or better. You can get a two-unit unit home starting at 580. Lenders set credit score requirements.

On the single-family side, FHA loans allow you to purchase up to four units with a credit score of 580 or better and 3.5% down payment. The FHA also has multifamily options available if you’re looking to buy a complex with five units or more. You’ll have to meet lender guidelines and have enough for down payment and closing costs.

Hard money loans

A hard money loan is usually based on the value of the underlying collateral alone. The “hard” part comes from the tangible value of the asset you’re looking to buy. Because your finances aren’t really being evaluated, these loans tend to come with shorter terms and higher interest rates. This is typically only used when you can’t qualify for other loans. If this is your only option, it could be advisable to wait and work on your credit.

Private loans

Private loans may often be thought of as those that fall outside traditional financing. These may be from individual investors. Seller financing falls into this category. So would loans from business partners, relatives or friends. There’s the chance of getting favorable terms, but any trouble with the payments could strain relationships. You may not enjoy the same borrower protections, either.

Portfolio Loans

When lenders make loans and hold onto them rather than packaging them to be sold to investors in the market, these are referred to as portfolio loans. Lenders may be willing to offer you different terms or finance different deals if they know they’re going to be holding onto the loan rather than selling to the investing public. The only downside here is that lenders may only offer these to their long-term clients.

Commercial loans

In the residential space, a commercial loan is any project with five units or more. You can get loans for these from lenders who work with Fannie Mae, Freddie Mac or the FHA among others. However, other types of loans may cater to business. You could choose to invest in manufacturing plants, healthcare centers or general office buildings. Commercial is a bit of a catch-all category, so you may have to find specialized lenders.

DSCR loans

A debt service coverage ratio loan (DSCR) is based on the receipts you take in from your rental property. The lender wants to make sure that the amount you get covers your expenses and loan obligations. In other words, when dividing all the money you receive from the property each month by the amount paid for home loans and maintenance, the result should be higher than 1. Rocket Mortgage doesn’t offer DSCR loans.

Bridge loans

Bridge loans are a form of temporary financing used while securing a more permanent alternative. For example, you might use a bridge loan to fund a down payment on a new home well selling your current one. The downside is the quick payoff timeline. Bridge loans aren’t offered by Rocket Mortgage.

SBA loans

If you’re looking for a loan for your business, you might turn to the Small Business Administration. There are several loan programs that can be used to get capital for your enterprise, fund building and equipment purchases to aid in expansion. There are a variety of terms and loan options that may be available to you. However, you’ll have to meet size standards, which vary by industry.

Applying for investment property loans: How to prepare

Now that we’ve taken a brief survey of the investment property landscape as a whole, let’s focus on residential real estate. The requirements for non-owner-occupied mortgages are different than they would be on your primary home. Your lender will be even more careful because there’s a higher risk of default and foreclosure on investment properties. If you have a financial setback, you’ll make the payment on your primary home first.

1.    Check investment property loan requirements

Considering an investment property? Here are a couple of Rocket Mortgage’s basic requirements:

• At least a 15% down payment; higher if you want multiple units
• Minimum 620 credit score (680 for a 15% down payment)

To help secure a competitive mortgage rate, raise your credit score or make a larger down payment on the home.

2.    Collect the necessary paperwork

Your mortgage application will proceed more smoothly if you have documentation ready upon request. Here are some of the typical items that lenders ask for to make sure you can handle your mortgage payment and closing costs:

• 2 years of tax returns
• 2 years of W-2s
• 2 months of bank statements and other investment account statements
• 2 most recent pay stubs

3. Secure mortgage preapproval

Preapproval lets you know exactly how much you can afford, but you need to make sure you understand how the lender gets there.

Preapproval vs. prequalification

The terms prequalification and preapproval are tossed around so liberally that even the experts sometimes misspeak. Prequalification involves a lender qualifying you based on an estimate of your income, assets and credit score. In a preapproval, your credit is pulled, and your income and assets are documented. Rocket Mortgage refers to this as a Verified Approval.² Real estate agents tend to prefer preapproved offers.

Types of investment properties

Depending on your expertise in different markets and your level of ambition, you might choose between several types of investment property.

Residential real estate

Residential real estate – single-family homes, condos, apartments, etc. – tends to be a popular investment because once up and running, it can be a reliable source of passive income. Just know that you have to attract tenants, so adding the marketing costs to the acquisition cost makes it a heavy upfront investment. If you choose to sell, you need a plan for handling existing rental agreements as well.

Commercial real estate

If residential isn’t your thing, maybe you would rather attract office tenants, retail and the hospitality sector. Money is made by collecting rent from tenants and selling if the value appreciates, like residential. Unlike residential, you have a different set of considerations for attracting tenants. Factors that impact what you can charge include placement, foot traffic and the demographic match between businesses and shoppers.

Raw land

Raw land has the most potential because it hasn’t been developed for a particular use. There are no buildings or agriculture. While Rocket Mortgage doesn’t offer them, you can get land loans to buy up lots. These can also be some of the riskiest ventures to try as an investor. You either have to develop the land yourself at great expense or wait and hope a buyer comes along with a vision they’re willing to pay for.

3 signs you’re ready to buy an investment property

Buying investment property requires an investor’s mindset. Here’s a checklist:

1. You’re financially stable enough to cover the costs: Based on the elevated lending risk, you can expect to make a higher down payment. The interest rate is also less favorable than it would be on a primary residence. Also consider marketing and whether you can afford temporary losses of income between tenants.
2. The return on investment (ROI) is there: Take into account your upfront investment, monthly mortgage payment and maintenance expenses against what you can make from rent every month to calculate ROI.
3. You have time to manage it: Passive income may be the goal, but that doesn’t make owning an investment property a passive endeavor. You have to handle maintenance and you may be required to give your tenants notice before dropping by, depending on local laws. Alternatively, you can pay a property management company to deal with logistics.

Investment property loan FAQs

We’ve covered the basics. Let’s answer a few more questions you may have.

Is it difficult to get an investment property loan?

The requirements lenders impose to get an investment property tend to be higher than they would be if it was a home you were living in. But the process itself is identical. You share income and assets, have your credit pulled and get an appraisal done.

What is the 2% rule for investment property?

The 2% rule says you can expect positive ROI from your rental property if the market will support you charging monthly rent equivalent to at least 2% of the purchase price. There is no hard and fast rule though. Others will tell you to follow the 1% rule.

Can I put down less than 20% on an investment property?

Rocket Mortgage allows you to put down as little as 15% for a single-unit investment property. While you can expect to put down 20% or more for homes with more units, you may also be able to part with as little as 3.5% – 5% of the purchase price if you use one of the units as a primary residence. VA loans generally don’t have a down payment requirement.

The bottom line: Owning an investment property requires planning and preparation

Buying an investment property can be a great way to earn passive income or remodel homes and flip them for a quick profit, but it’s important to make sure that you have the financial wherewithal to handle the upfront costs and payments and that your business venture has properly contemplated the ROI. Looking at a single-family rental? Start your mortgage application.

¹ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 2/5/2024 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00. Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Schwab products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher priced loans are not allowed on properties located in New York. Additional restrictions apply. This is not a commitment to lend.

² Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, assets and debt. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, including, but not limited to satisfactory insurance, appraisal and title report/search, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close due to a Rocket Mortgage error, you will receive the $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply.