Understanding Investment Property Loans

The purpose of investment property loans is to finance projects in which properties in disrepair are fixed up to be resold or rented. These are typically short-term loans and are sometimes called hard-money or bridge loans. Investment property loans cannot be for the investor’s primary residence, however, if the property is multiple units, they may be able to live in one of the units and still get the loan. 

Where to Go for an Investment Property Loan

When searching for an investment property loan, you’ll probably hear one of two options--a bank or a hard-money lender. A bank might include the U.S. Bank or Wells Fargo, but it could also include your local bank or credit union. Hard-money loans come from commercial financial firms like Lima One Capital or Patch of Land. 

Choosing between a Bank or Hard-Money Loan

Hard money loans have their advantages and disadvantages. For example, one advantage is that your credit score doesn’t necessarily matter, as long as you have sufficient cash to contribute. It’s also faster to arrange a loan through a hard-money loan. The disadvantage of a hard money loan is that they typically have higher interest rates than banks. Banks require higher credit and take longer to draw up a loan. However, both banks and hard-money lenders typically have the same loan term.

Qualifying

To qualify for an investment property loan from a bank, you’ll want to have good credit. Credit around 720 and higher will help get you a reasonable interest rate. You’ll probably need to provide the bank with a business plan for the home with a budget for renovation costs and property assessments. If you do qualify, you can expect about 80% of the before-repair value from a bank loan. When using a hard money loan, your credit score can be lower and you can expect them to lend about 60%-80% of the after-repair value. For either lender option, you’ll need to prove that you have enough cash to dedicate to about 20% to 40% of the project. 

How it Works

An investment property is the collateral of the loan. The lender, either the bank or the hard-money lender, will finance part of the project--either the purchase value, the cost of fixing it up, or both. The lender evaluates the property’s price, what the investor is willing to pay, and the estimated value of the property after repair. This will help the lender decide how much to value the loan for and what the interest rate and payback period will be. For investors who wish to rent the property once it is fixed up, replace a short-term loan with a conventional long-term mortgage at a better interest rate.

If you are interested in flipping a home and then filling it with renters, consider using an investment property loan to help you pay for the cost of the property or the improvements. Using a loan will help you reach your goals of owning a rental property quickly. With the money from renters, you’ll have extra income to help you pay off the loan or mortgage of the property.