Conventional lending isn’t the only path to investing in real estate.
There are various forms of real estate investor financing, some of which are beyond the scope of traditional and non-traditional lending.
In our ultimate guide, we share everything you need to choose the right type of financing.
How to prepare to obtain financing
The most successful real estate investors know how to prepare to obtain financing. They have a process that guides them from start to finish, providing them with both information and confidence.
While no two investors take the same approach, lay a winning foundation by completing the following:
- Create a realistic list of numbers on the property you want to buy (buying price, down payment, etc.)
- Review your credit report and credit score, and correct any errors
- Determine how to secure the necessary down payment and have it ready to access
The work you put in upfront allows you to more quickly and efficiently move through subsequent steps.
Understand the loan process
The loan process varies based on your loan type, but there are steps that typically hold true across the board, including:
- Form your business plan
- Gather your down payment
- Get pre-approved
- Find the right property
- Negotiate closing costs
- Supply required documentation
- Authorize an appraisal order
- Sign final loan documents
- Get the keys
- List for rent
Some of these steps are easier to complete than others. For example, you may already have a business plan from a previous purchase. Conversely, if you’ve yet to find the right property, it could take several weeks or months to do so.
Patience and accuracy are critical at every step in the loan process.
The ultimate list of investor financing loans
Now that we’ve discussed the basics, let’s compare the most common types of investor financing loans.
Primary residence home equity loan or line of credit
Do you have equity in your primary residence? Tapping into that equity is one of the fastest and most convenient ways to obtain financing for a real estate investment.
- Down payment: n/a
- Credit score: 620
- Debt-to-income ratio: n/a
- Time to close: 10-30 days
The primary benefit of a home equity loan or line of credit is to get up to 100% of your home’s value to affordably turn equity into cash.
Investment property home equity
Do you already own an investment property? You may be able to tap into its equity to purchase another property or for a down payment.
- Down payment: n/a
- Credit score: 620
- Debt-to-income ratio: n/a
- Time to close: 10-30 days
Cash-out loans and lines of credit for your investment property are both options to consider.
DSCR loans
A Debt Service Coverage Ratio (DSCR) loan allows you to purchase an investment property based on its future cash flow. These loans are flexible and no tax returns or debt-to-income verification is required.
- Down payment: 20-25 percent
- Credit score: 640
- Debt-to-income ratio: n/a
- Time to close: Several weeks
If you’re considering properties with day one cash flow, a DSCR loan may be the answer.
Real estate business cash flow
This is one of the most unique forms of real estate investor financing. Nectar, a marketplace for real estate cash flow, can offer a cash advance based on the entire cash flow of your business, as opposed to a specific property.
- Down payment: n/a
- Credit score: n/a
- Debt-to-income ratio: n/a
- Time to close: seven days
Nectar has a simple, fast application process that can be completed online.
Private financing
There’s no shortage of private investors to work with. They’re always on the lookout for good deals and new partnerships. Get started by making connections with investors in your local community. You may be surprised at how many of them exist.
- Down payment: varies
- Credit score: varies
- Debt-to-income ratio: n/a
- Time to close: days
Seller financing
This is an option for both residential and commercial investments, although it’s more common in the commercial space. It never hurts to ask the seller if they’ll finance the purchase. This allows you to negotiate a smaller down payment and better terms when compared to alternative options.
- Down payment: varies based on negotiations
- Credit score: n/a
- Debt-to-income ratio: n/a
- Time to close: days
Fix and flip
With a fix and flip loan, you take on a short-term mortgage to help finance the purchase, repair, and renovation of your rental property. A short-term allows you to secure favorable terms, with the ultimate goal of selling the property quickly.
- Down payment: 20-30 percent
- Credit score: 620
- Debt-to-income ratio: less than 50 percent
- Time to close: days
Bank statement loans
With a bank statement loan, you can use 12 to 24 months of bank statements to prove your income. These statements replace your tax returns in the loan approval process. This is an advantage to self-employed investors with in-depth write-offs.
- Down payment: 10-25 percent
- Credit score: 620-660+
- Debt-to-income ratio: less than 50 percent
- Time to close: 15-30 days
FHA 203k Rehab
A FHA 203k Rehab allows you to buy and fix a property with one loan. The catch is that you have to live in the property for a minimum of 12 months from your closing date. After that, you can move out and convert the property to a rental.
- Down payment: 3.5%
- Credit score: 580
- Debt-to-income ratio: 45%
- Time to close: 45-75 days
Hard money loan
A hard money loan is a type of short-term financing used to stabilize the property and make it eligible for traditional financing. These loans don’t have the same red tape and paperwork as conventional loans.
- Down payment: n/a
- Credit score: n/a
- Debt-to-income ratio: n/a
- Time to close: Sometimes less than a week
Conventional loan
Don’t overlook an old-fashioned conventional loan. You need a 20 percent down payment, strong DTI, good credit, and proof of income. If you have that, you gain access to a more standardized program and potentially better rates.
- Down payment: 3% (House hacking) - 20%+ (investment property)
- Credit score: 620
- Debt-to-income ratio: 43%
- Time to close: 30-60 days
Commercial loan
This is a large umbrella, as many types of loans live within the commercial lending universe. However, you may need to consider this if a property can’t be classified as residential. There are several flexible lending options for commercial properties.
- Down payment: 20 percent
- Credit score: 600
- Debt-to-income ratio: n/a
- Time to close: 30-60 days
Business loans
There are times when loan approval is based on your business, not on the property itself. You can use a business loan to purchase a home and then refinance it into a residential property loan.
- Down payment: 20 percent
- Credit score: n/a
- Debt-to-income ratio: n/a
- Time to close: Varies
Interest only
This is more of a “feature” and less of a “loan program”, but the interest-only loan allows you to pay interest only each month. Doing so increases cash flow and makes it easier to qualify for cash-flow-based financing, such as a DSCR loan.
- Down payment: varies based on loan type
- Credit score: varies based on loan type
- Debt-to-income ratio: n/a
- Time to close: varies based on loan type
Local credit union
As a real estate investor, you want to have a sound relationship with your local credit union and/or bank. This is often the best way to obtain key financing deals when they become available.
- Down payment: 20 percent
- Credit score: 620
- Debt-to-income ratio: n/a
- Time to close: Days or weeks
Asset depletion
This allows you to qualify based on a sum of funds that you have in reserve. For example, a $3 million nest egg, in theory, will provide $8,000 of income per month for 30 years before it is depleted. Some lenders will count that as monthly income.
- Down payment: varies
- Credit score: varies
- Debt-to-income ratio: n/a
- Time to close: 20-45 days
There’s no shortage of options
With this information, you should feel more confident to secure the right type of real estate investor financing. And when you’re ready—REInvestor Guide can help.
