The Top Loans Real Estate Investors Should Consider in 2023

Amid increased mortgage rates, finding the best loans for investment property is crucial for the success of a real estate business in 2024.

How you finance the purchase of a rental property is always important as it affects the size of the investment, which in turn impacts the rate of return. However, it has become even more important in recent months as a result of rising interest rates. It has made the financing of investment properties more expensive.

Beginner real estate investors mistakenly consider conventional mortgage loans to be the only or at least the predominant option. The truth is that there are various types of bank and other loans that make sense for investors and that allow for buying the best investment property.

In this article, we will define an investment property loan and discuss when it’s a good idea to take out one to purchase a rental. We will focus on the most appropriate varieties of loans for investors and their needs, covering both the pros and cons as well as the interest rates you can expect at the moment.

Lastly, we will show you how to identify and buy top-performing long term and short term rental properties across the US market, regardless of your financing solution. The tools available on the Mashvisor platform can help you locate both excellent markets and ideal properties for real estate investing.

How to Find an Investment Property

Now that you know the best loans for investment property in 2024, let’s look at the process of finding good rental properties. After all, securing a good financing option is just one of the requirements of starting a profitable real estate investment business.

Here’s our step-by-step guide on how to find top-performing long term and short term rental properties:

Conventional Mortgage Loan

The first type of loan that real estate investors have access to is the conventional mortgage loan. Similar to financing the purchase of a home, this investment loan is usually borrowed from a bank, which can be a large national bank or a small local bank. The term, the structure, and the interest rate can vary depending on the bank and your particular financial situation.

Mortgage loans can be divided into two broad categories: fixed-rate mortgages (FRM) and adjustable-rate mortgages (ARM). In the first case, you agree to pay the initially set interest rate for the rest of the loan duration. In the second case, the rate might be changed in a few years to reflect the current situation in the mortgage market.

If you’re wondering, “Is it easy to get a loan for an investment property?” the truth is that it is a bit harder than qualifying for a mortgage loan for your home. That’s because investors are seen as riskier borrowers than homeowners. In case of financial hardship, you’re more likely to pay your home mortgage first and your investment property loan second.

The main benefits of using a mortgage to buy an investment property are:

• Many different options: With mortgage loans, you can choose between various terms, structures, and other factors. So, adapting the loan to the specific needs of the long term or short term rentals for sale that you are buying is feasible.
• Lending institution reliability: Most mortgage lenders are national, regional, or local banks with an established reputation in the market. They are very likely to hold on to their side of the deal.
• Applicability to most investors: Unless you have a terrible credit history, you are likely to qualify for a mortgage loan. If you cannot maintain a good credit score, it might not be a good idea to invest in real estate, which requires superior financial planning.
• Long term: In most cases, conventional mortgages last 15 to 30 years, which translates into small monthly payments. It makes such types of loans easier to repay and less risky and does not impact the ROI so much.
• Flexible real estate strategy options: While some of the best loans for investment property are limited to buying a home, conventional mortgages can be used for purchasing a rental property. There are no limitations in this regard, so you can go for long term rentals or Airbnb for sale.
• Access to the best markets for real estate investing: Conventional mortgage loans are not subject to geographical restrictions. It means you can live in one location and borrow money to buy an investment property in another. So, you can aim for the top markets for your preferred rental strategy.

Meanwhile, the most significant drawbacks of mortgages include the following:

• Sizable down payment: If you’re thinking, “Can I put less than 20% down on an investment property?” the answer is no. It’s the minimal down payment requirement for most conventional mortgages when buying an investment property (not a home).
• Potentially high mortgage rates: Since the beginning of the year, the interest rate on mortgages has gone up significantly, reaching 6.24% for a 15-year FRM and 6.94% for a 30-year FRM as of May 23rd. This was actually at the lower end of the 52-week range when the mortgage rates went as high as 7.79%.
• Credit score requirements: The minimum credit score needed for a conventional mortgage is around 620, which might pose a challenge for some investors. But if you cannot take care of your credit score, you might be unable to manage an investment property.

The second type of loan you can take out to buy an investment property is an FHA loan. It is a government-backed mortgage with looser loan requirements, which may give access to financing to borrowers who do not qualify for a conventional mortgage loan.

However, the trap is that an FHA loan applies only to buying a primary residence and not a second home, a rental property, an income property, or an investment property. But you might be able to get around this requirement if you don’t own a home yet and decide to go for house hacking.

House hacking is a real estate investment strategy for beginners in which you purchase a small multifamily home to live in one housing unit and rent out the rest. Duplexes, triplexes, and quadruplexes are ideal for this purpose. You could even buy a larger home and rent out the other bedrooms as SRO or single-room occupancy. You can rent out the available units or rooms on a long term or short term basis.

So, in case you’re still wondering, “Can I put less than 20% down on an investment property?” The answer is yes, with an FHA loan.

FHA mortgage loans provide some important benefits over other best loans for property investment, including:

• Low down payment: FHA loans lower the minimum down payment requirement from 20% to only 3.5%. It means that investors require less capital to get started in real estate.
• Low interest rates: As of May 28th, the 30-year FHA rate is 6.97%, which is almost the same as a 30-year fixed-rate mortgage. When you consider this along with the lower down payment requirement, repaying an FHA loan becomes more affordable.
• Low credit score: With a credit score as low as 580, you can put down 3.5% of the property price. The required credit score for an FHA loan can go down to as little as 500 if you can make a 10% down payment.

Using an FHA loan to purchase an income property comes with a few downsides, such as:

• Limited real estate investing strategy options: FHA loans can be used exclusively to buy a primary residence. Investment properties do not qualify. Again, you can opt for house hacking if you don’t own a home and want to invest in the market where you live.
• Limited loan size: In 2024, the upper ceiling for an FHA loan for a single family home is limited to $498,257 in most areas and $1,149,825 in high-cost areas. With the US median property price being $420,800 as of Q1 2024, investors might face limited options.
• Mortgage Insurance Premiums: An FHA loan requires both upfront and annual mortgage insurance premiums (MIPs). The MIPs are necessary mortgage insurance paid by the borrower to protect the bank or another lender from potential monthly payment defaults. It is a must because of the less strict qualification requirements.

Another financing option worth considering in 2024 is a VA loan. It is a government-backed mortgage available to veterans, service members, and surviving spouses. Consequently, it can meet the needs of only a certain type of real estate investor. Nevertheless, the terms and conditions are very favorable.

Similar to an FHA loan, VA loans must be used to buy a primary residence. Again, rental property investors can circumvent this requirement with the house hacking strategy. However, they need to conduct careful real estate market analysis to ensure that their location is good for long term or short term rentals in small multifamily homes.

The main advantages of this type of investment property loan include the following:

• No down payment: The US Department of Veteran Affairs does not ask for a down payment on VA loans, which makes it the most accessible for qualified first-time investors.
• Low interest rates: VA loans offer lower mortgage rates than other best loans for investment property. As of May 27th, the interest rates are 6.25% for both a 20-year and a 30-year fixed VA purchase. It is significantly less than the conventional mortgage and the FHA loan interest rates.
• No credit score requirement: The VA does not require a minimum credit score for VA loan eligibility.
• Limited closing costs: VA loans’ closing costs are lower than conventional mortgages’ closing costs. This is an important benefit that makes financing an investment property more affordable.
• No Private Mortgage Insurance (PMI): With a VA loan, there is no need for Private Mortgage Insurance (PMI), helping lower the investment cost.
• Multiple uses: It is considered a lifetime benefit, meaning that eligible borrowers can use a VA loan repeatedly as long as they meet the eligibility criteria.

Meanwhile, the disadvantages of this loan type are:

• Lenders imposing down payment requirements: While the VA does not require a down payment, banks and other financial institutions giving the loan might have such a requirement. It’s worth checking out several different institutions to select the best option for your needs.
• Lenders imposing credit score requirements: The VA Department does not expect a minimum credit score, but it cannot prevent lending institutions from doing so. In many cases, banks expect a credit score of 620 or more to give out a VA loan. It makes such types of loans comparable to conventional mortgages.
• Limited investment options: VA loans are meant to give veterans access to homeownership, so technically, you cannot purchase an income property with one. But you can use a VA loan to get into real estate investing if you opt for house hacking. Just do a rental market analysis to ensure that investing in your location makes sense.

BEST Loan Option For Real Estate Investors

FAQ

What type of loan can I use for an investment property?

Can you take out a loan to invest in real estate?

How to avoid 20% down payment on investment property?

Is it harder to get a loan for an investment property?

What financing options are available for real estate investors?

Real estate investors will encounter various financing options, including traditional mortgages, hard money loans, private money loans, partnerships, and more. The key to harnessing the power of these loans lies in understanding which option best aligns with current investment objectives.

What types of loans can you use for investment property?

Let’s explore the different types of loans you can use: 1.**Conforming Loans**: These are the most common option for investment properties.They work similarly to standard mortgages for homes with 1-4

What are the best real estate investments for VA loans?

The best real estate investments for VA loans are properties where the investor intends to reside, such as a multi-unit property with rental income potential, allowing them to take advantage of the benefits while generating rental revenue. 8. Commercial Loan

What are the best real estate investments for commercial loans?

Nonetheless, the best real estate investments for commercial loans are large-scale properties with significant income potential, such as multifamily apartment complexes or commercial spaces in prime locations, where the anticipated revenue can justify the loan terms. Ready to start investing in real estate?