So, you’ve got your finances in check. You pay your bills on time, have an emergency fund tucked away in a high-yield savings account, and you’re even saving for retirement. Maybe you’ve got some investments in things like CD ladders too. Now you’re starting to entertain the idea of buying an investment property, whether for renting out or flipping.
Investing in real estate can be a solid way to grow your wealth over time, but it’s different from buying a primary residence, especially when it comes to financing. Let’s dive into what it means to buy investment property.
What is investment property?
Simply put, investment real estate refers to properties you purchase with the intention of making a profit. This typically includes land and the buildings on it.
If you’re looking to rent a property, your goal is to set a rental rate that will cover your monthly expenses while offering long-term financial benefits. On the flip side, if you plan to flip the property, you aim to buy it at a lower price, make some improvements, and then sell it for profit, usually within six months to a year.
In fact, in 2024, investors purchased 13% of all homes sold. That’s a slight bump from 12.7% in 2023 but down from the high of 13.3% in 2022.
Are you ready to buy investment property?
Unless you’ve got a pile of cash lying around, you’re likely going to need some funds to purchase investment property. Because of the risks involved, lenders usually impose stricter requirements for these types of loans, such as:
- Higher down payment: Expect to fork over at least 15% to 20% down on a property. That’s a lot more than the usual minimum down payment of around 3% to 5% for many standard loans, thanks to the higher risks tied to investment properties.
- Higher credit score requirement: Darren Stroud, a senior vice president and branch manager, notes that while traditional loans often require a minimum score of 620, many lenders may ask for 680 or higher. To snag the best interest rate, aim for a score in the 700s.
- Cash reserves: Depending on your loan amount, many lenders will require you to have at least three to six months of cash reserves to qualify. This provides a buffer in case your property sits empty for a while, Stroud explains.
When weighing whether to buy, think about whether you want to deal directly with tenants or hire a property management company, which can add monthly fees. Similarly, consider if you’ll do the renovations yourself or hire a contractor.
Investment Property Financing Options
While some investors buy properties outright, others look for a variety of financing options. Here are some common avenues:
You can get up to 10 traditional mortgages for investment properties. Non-QM lenders follow different rules, and while there’s technically no limit on how many loans you can secure, you must meet the qualifications for each one.
Traditional loans
For investment properties, you can qualify for a traditional mortgage with a loan-to-value ratio of 85% and a cozy credit score of at least 680. You can secure funding for up to 10 properties, which may include up to nine units.
Keep in mind, traditional loans come with their own set of restrictions, and you’ll have to qualify for each one. This can be tricky, especially depending on your debt-to-income ratio and cash reserves.
Fixed-rate mortgages are generally more popular than adjustable-rate mortgages, where rates can fluctuate after an initial period. However, some investors might find adjustable rates appealing if they intend to sell before that period ends.
Government-supported loans
While government-supported loans can’t fully fund an investment property, they do allow you to buy multi-family homes (up to four units) as your primary residence, live in one unit, and rent out the others. This is called “house hacking” and it’s allowed with FHA and VA loans. FHA loans come with different restrictions based on where you’re buying, while most VA loans don’t have a loan limit.
For FHA loans, there’s typically a minimum 3.5% down payment if your credit score is 580 or more. VA loans can have zero down payment, although some lenders may set credit requirements at 620 or higher, while others may lower it to 580.
Non-QM loans
A non-qualified mortgage doesn’t meet the federal qualifying criteria for a standard mortgage. Generally, fees for non-QM loans are higher than traditional options because they offer more flexibility and larger amounts.
A common option is the Debt Service Coverage Ratio (DSCR) loan, which assesses your ability to repay based on projected rental income. Investors often create limited liability companies to gain tax advantages and protect personal assets from any defaults.
For instance, Deephaven Mortgage partners with U.S. lenders on non-QM products, offering up to 80% financing and max loan amounts of $2.5 million on DSCR loans. Lenders usually want three months of cash reserves for loans under $1 million and six months for loans above that amount.
Hard Money Loans
Hard money loans can come from private investors or companies and often require collateral, like property, to secure the loan. These loans tend to have shorter repayment terms and higher interest rates than traditional mortgages, but they can be processed quicker and with fewer obstacles.
It’s crucial to ensure you can repay what you borrow before diving into this type of funding.
What does it mean to have a high mortgage rate?
According to Freddie Mac, the average rate for a 30-year fixed mortgage hit over 7% in January 2025—the first spike this high since May 2024. Rates are close to that mark now, yet it might still not be a bad time to pursue investment properties.
As Davis from Dephaven notes, women investors are still active in the market, even with fluctuating rates. In times when rates rise and housing becomes less affordable, the demand for rentals can increase. Thus, real estate investors often focus less on interest rates, seeing them as opportunities for profit.
Preparing to buy investment property
If you’re looking to grow your real estate portfolio, the initial step is to assemble the right team for support and to flag any potential issues, suggests Daniel Mirabel, principal at NUIC Development in New Jersey.
Your team should include experienced real estate agents, lenders who specialize in investment loans, real estate attorneys, home inspectors, and title agents.
Questions to ask when purchasing investment property
As you embark on buying an investment property, it’s vital to conduct thorough research and ask important questions, according to Mirabel. Here are some to consider:
- What is your current or projected income?
- What are the estimated monthly expenses, such as mortgage payments, property taxes, insurance, HOA fees (if any), utilities, and maintenance costs?
- If the property is under an HOA, what are the fees and regulations? What’s the financial status of the association?
- Will you be managing rentals yourself, or will you hire a property management company? What would that cost?
- What is the rental history and current occupancy rate of the property?
- How often do tenants move out, and what are the typical reasons for leaving?
- Is the property in good condition, or will it require repairs? If repair work is needed, how long will it take?
- Is the area experiencing growth, or are property values declining?
- Are there future developments that might impact property values?
- Is the property generating positive cash flow, or will it need further investment?
- What is the capitalization rate (a metric that indicates profitability in comparison to purchase price)?
- Is the property zoned for residential use? Are there any limitations on short-term or long-term rentals?
- If flipping, how long until renovations and resale are completed?
Take home
Ultimately, if you’re ready to dive into investment properties, there are various financing options to explore, including traditional mortgages, non-QM loans, and hard money loans. Be aware that your financial requirements may be stricter compared to purchasing a home for personal use.
Investing in property can be a proactive way to create long-term wealth and earn passive income, but it comes with inherent risks. Collaborating with experienced real estate professionals can guide you in finding promising properties and connecting with the right mortgage providers for your needs.
