Is It Hard to Get an Investment Property Loan? A Complete Guide

David Cohn

Real estate can provide good opportunities for growing wealth, even for small investors who rent out or flip smaller assets. That said, it takes some hard work to be able to make a profit. Just because you invested some money in property does not automatically mean that you will earn from it. That is one of the reasons why it can be challenging to secure an investment property loan.Despite that, it should not deter you from pursuing an investment property. This guide should help you make an informed decision should you decide to get an commercial investment property loan.

What exactly is an investment property?

Essentially, an investment property is one that you buy for the sole purpose of making money—not to live in or use for personal purposes, but to generate income. Some investors buy commercial real estate and then do renovations and repairs to increase its value, to sell it for a profit. That's one way to make money out of an investment property—and it's called flipping. Other investors prefer a long-term strategy, purchasing commercial property and renting it out. This allows them to collect rent while allowing the property's value to appreciate over time and perhaps sell it for a profit down the line.

What is an investment property loan?

Unless you are sitting in a lot of cash, you probably need to take out a loan if you want to start investing in an investment property—especially commercial real estate. Lenders, however, consider investment property as high-risk. That's because investment properties typically fail somewhere along the way, resulting in borrowers being unable to repay their debt.The burden is even bigger for borrowers still paying off other loans—such as the mortgage on their primary residence or a mortgage on another commercial property. As a result, it cannot be easy to get an investment property loan. Moreover, terms may be less favorable, and the loan itself may cost more to take out.

Factors that make it challenging to get an investment property loan

Lenders generally perceive investment properties as a higher risk. You might find it hard to get a loan because of these reasons:

  • The credit score requirement is higher – Your score helps lenders discern how financially capable and responsible you are.
  • It would help if you had a better debt-to-income ratio – Lenders want to make sure that you can afford monthly mortgage payments on the investment property.
  • At least 20 percent down payment – A bigger down payment helps offset the risk of a foreclosure on an investment property.
  • High risk – Some lenders do not want to risk, especially if they have had any previous negative experience with investment property loans.
  • Reaching mortgage ceilings – Having many investment properties can make it challenging to get more investment property loans.

Types of investment property loans you should know about

It's certainly challenging to get an investment property loan, but that does not mean you should give up. It's worth trying to get a loan, especially if you have set your eyes on an investment property that has the potential to be very profitable in the long run. Where do you start? Here are the different types of loans you can consider:

Private money

This can come from individuals who might have extra money and are actively looking for opportunities to invest. They could be your friends, family members, colleagues, or another property investor. Fewer formalities, the possibility of lax conditions, negotiability, and lower interest rates make this type of loan an attractive option. Still, you will need to secure it with the existing mortgage of the income property or using a promissory note. This way, if you fail to pay back the loan, a foreclosure can be initiated by the lender. Take note that there is a risk that your personal relationship with the lender may be affected if you are unable to pay them back.

Conventional mortgage

A conventional investment property loan comes from a private hard money lender. It requires at least a 720 credit score, which can still be flexible depending on your credit history, debt-to-income ratio, and other factors. Here are more things to know about it:

  • A 20 percent down payment is required
  • The interest rate can be around one to three percent more than that of a regular home loan
  • Fees are likely higher because of the risk-based pricing adjustment by Fannie Mae (0.75 percent)
  • The LTV must be around 80 percent or less
  • Lenders may require a maximum of six months' worth of liquid reserves

Take note that you will not be able to take out a conventional investment property loan if you already have four mortgages under your name. Fannie Mae has a special program that can let you have between five and 10 mortgages to your name. Still, you have to make a 30 percent down payment for a two to four-unit property or a 25 percent down payment on single-family homes, and your credit score must be at least 720 with six or more mortgages.

Hard money

Also known as commercial real estate loans, these investment property loans are often taken out by professional real estate investors and investors who intend to purchase fixer-uppers to be flipped quickly. Here are the important things to know about commercial hard money loans:

  • Typically approved on the same day of your application, the funding can be available within three days after approval.
  • You could qualify even with a poor credit score or despite having over four mortgages to your name, as long as you can provide a 25 to 30 percent down payment.
  • Ideal for short-term investors, as they need to be paid back in one to two or three to five years.
  • Interest rates can be steep at 9 to 14 percent
  • Upfront fees range from two to four percent of the loan

Home equity loan

Borrowing against the equity you have in your primary residence can be another option to acquire an investment property loan. It is easier to qualify for a home equity loan, and the terms are likely more favorable as your own home will be the collateral. This way, lenders' risk is lower when they know that the homeowner will do their best to avoid defaulting. Here are the qualifications:

  • At least 620 on your credit score
  • A 43 percent or lower debt-to-income ratio
  • A good credit history

Things you can do to improve your chances of approval

Here are some strategies you can use to make sure you get the funding you need:

  • Prepare a formal and solid investment strategy – Lenders may feel more confident when you give them the assurance that you are aware of what you are doing and have a solid plan of action.
  • Improve your credit score – Proactively boost your credit to make yourself more qualified and help lenders realize that you can pay your debts and bills on time.
  • Maintain enough personal savings – Sufficient cash on hand for the down payment and to cover up to six months' worth of mortgage can further convince lenders that they can trust you with their money.
Getting a good investment property loan

Shop around for a loan while being guided by reputable and experienced commercial real estate investment advisors. They can help you find tailored solutions that are ideal for your situation and might not be available through traditional channels.