How to Finance an Investment Property for the First Time

How to Finance an Investment Property for the First Time

How to Finance an Investment Property for the First Time

Investing in real estate can protect against inflation, expand your wealth portfolio and hedge against stock market volatility. Still, investing in real estate is not without its own risks. If you’re thinking about buying a second home or investment property, it’s wise to know your options. Especially how to finance an investment property. Doing a bit of homework will help clarify the risks and outline the benefits before you jump in.


Whether this is your first fix-n-flip, a second vacation home, or your third rental property, knowing how to finance an investment property will save you money and increase your profits. Here’s the shortlist to keep on hand:

1. Decide on the right type of investment property.

 Before you decide how to finance an investment property, think about the type of property you want to invest in. Do you want to generate passive income from a rental unit? Are you looking to restore a home for 2-3 years and sell it for a profit? Do you love fixer-uppers and you want to fix-and-flip a property in less than six months? Maybe you want to buy a fourplex and live in one of the units while you collect rent to cover the mortgage on the property.

Depending on your vision, choosing which type of property will directly impact how you finance an investment property. Lenders have different requirements depending on the type of investment property you want to finance. As a result, you will need to provide various documentation and qualify with certain parameters. Talk with a qualified mortgage broker to determine which type of property and financing fits your borrower profile.

2. Build a strong borrower profile.

Your credit score is typically the most influential factor in determining your interest rate for a home loan, and financing an investment property is no different. Whether you decide to work with a mortgage broker, a bank, or private lenders, your credit score matters. Every lender is in the business of determining risk. Your credit report is one way to show that you pay back your loans as agreed.

The next biggest factor is your debt-to-income ratio. So pay down your debts, especially consumer debt and credit cards, so that your ratio is favorable. Next, check your credit report to fix any errors or misinformation. If you have a few late payments, be prepared to offer an explanation.

For the best loan terms, aim for a credit score above 720. That said, you can finance an investment property with a credit score of 640-720, depending on the lender.

3. Prepare to make a substantial down payment toward the investment property.

 To finance an investment property, most lenders look for a down payment of at least 20%. Some lenders require at least 30%. The higher your down payment, the better terms you’ll be able to secure to finance an investment property. If you have substantial equity in your primary residence, consider refinancing your mortgage and accessing that equity with a cash-out mortgage refinance. There are also some loans that allow for the use of gifted funds, so discuss your goals with a mortgage broker. An experienced mortgage broker can help determine the best way to finance an investment property. A path that saves you money and increases your profits.

4. Understand your financing options for an investment property.

How do I finance an investment property? This is the number one question I hear from clients. There are a number of options available, but here are the top five financing options when you’re buying an investment property for the first time.

Next post, we’ll dive into each of these options to determine the risks and benefits:

  • Home equity line of credit
  • Home equity loan
  • Conventional home loan
  • Personal loan
  • Hard money loan

5. Partner with a local mortgage broker

Big banks, private lenders, and mortgage brokers are the main sources of funding when it comes to financing an investment property. Big banks can get the job done, so if you have a substantial down payment and an excellent borrow profile, this is an option worth considering. There is less flexibility when you work with a big bank, but if you have experience investing in real estate, this might be a streamlined process for you.

Private lenders, on the other hand, will give you much more flexibility and may be easier to qualify, but beware that interest rates can run very high. Private lenders are willing to take on more risk in exchange for a higher return, so that cost gets pushed onto you, the one financing an investment property.

Partnering with a local mortgage broker is the best decision for most homeowners ready to finance an investment property. Why? A local mortgage broker is a wise partner when it comes to the local real estate market, home values, trends and risks. In addition, an experienced mortgage broker can leverage their partnerships with lenders across the nation so that you get the best financing available. A mortgage broker will work on your behalf to create a borrower profile that will be favorable and work on your behalf to get the financing terms you deserve.

What’s Next

Buying an investment property for the first time is an exciting decision, one that will expand your investment portfolio and potentially generate passive income. The best part is, deciding how to finance an investment property doesn’t need to be stressful. We work with clients from California, Oregon, Washington, and Colorado and we partner with lenders across the nation so we can get you the best financing. We can secure competitive quotes from multiple lenders to make sure you get the best financing possible at the rate you deserve. Connect with us today to get started.