Best Loan Options to Buy an Investment Property
Conventional Investment Property Loans
Conventional loans are the most common financing option for investment properties, particularly for buyers purchasing their first rental. These loans are underwritten primarily on the borrower’s financial profile, including income, credit score, assets, and existing debt.
Down payment requirements typically range from 15% to 25%, with stronger borrowers qualifying for more favorable terms. Interest rates are higher than owner-occupied loans but remain relatively competitive compared to alternative financing. Conventional loans often offer fixed-rate options, which provide predictability and stability for long-term investors.
The main advantage of a conventional loan is long-term cost efficiency. For buy-and-hold investors with strong personal finances, conventional loans often provide the best balance of rate, stability, and return. The limitation, however, is scalability. Most conventional lenders limit the number of financed properties a borrower can carry, which can become a constraint as a portfolio grows.
DSCR (Debt Service Coverage Ratio) Loans
DSCR loans evaluate risk based on the property’s income rather than the borrower’s personal income. Instead of focusing on debt-to-income ratios, lenders look at whether rental income sufficiently covers the mortgage payment.
These loans are popular with experienced investors, self-employed buyers, and anyone whose personal income does not accurately reflect their investing capacity. They are particularly well suited for stabilized rental properties or properties with predictable income.
The tradeoff is cost. DSCR loans typically carry higher interest rates and require larger down payments, often around 20–25%. They may also include prepayment penalties or shorter fixed-rate periods. For investors prioritizing scalability and flexibility, DSCR loans can be a powerful tool when used intentionally.
FHA Loans (House Hacking)
FHA loans are not traditional investment loans, but they can be used strategically through house hacking. FHA financing allows buyers to purchase properties with up to four units, provided they occupy one unit as their primary residence.
The primary appeal is the low down payment requirement, often as low as 3.5%. This significantly lowers the barrier to entry for first-time investors. Rental income from the remaining units can help offset housing costs and, in some cases, produce positive cash flow.
Keep in mind that FHA loans require owner occupancy, include ongoing mortgage insurance, and restrict flexibility if the investor wants to move or refinance quickly. They tend to work best for buyers willing to live in the property for at least a year and treat the investment as a foundational step rather than a permanent structure.
VA Loans (Eligible Buyers)
VA loans offer some of the most favorable terms available for qualifying veterans and service members. These loans allow for zero down payment and competitive interest rates, even for multi-unit properties when the borrower occupies one unit.
For eligible buyers, VA loans can be a powerful entry point into real estate investing through house hacking. The absence of a down payment preserves capital, while rental income helps offset ownership costs.
The tradeoff is reduced flexibility. VA loans come with occupancy requirements and are not designed for pure investment use. They are usually best suited for buyers who plan to live in the property and incorporate investing into their long-term housing strategy.
Portfolio Loans
Portfolio loans are issued by banks and credit unions that keep the loans on their own books rather than selling them to Fannie Mae or Freddie Mac. This allows for more flexible underwriting and customized terms.
These loans can be particularly useful for investors with multiple properties, unconventional income, or complex financial profiles. Portfolio lenders may evaluate overall asset strength, banking relationships, and long-term strategy rather than rigid formulas.
The downside is variability. Rates, terms, and requirements vary widely by lender, and portfolio loans may include balloon payments or shorter amortization schedules. They require careful review but can unlock financing options that conventional lenders will not consider.
Hard Money Loans
Hard money loans are short-term, asset-based loans typically used for fix-and-flip or value-add projects. Approval is based primarily on the property’s value and potential rather than the borrower’s income.
These loans move quickly and offer flexibility where traditional financing cannot. They are often used when properties need significant renovation or when speed is critical to securing a deal.
The cost for a hard money loan can be significant. Interest rates are high, fees are substantial, and repayment timelines are short. Hard money loans are generally seen as a tool, not a long-term solution, and can erode returns rapidly if the exit strategy is delayed.
Private Money Loans
Private money loans come from individuals or small groups rather than institutions. Terms are negotiated directly and can be highly flexible. These loans are relationship-driven and can offer creative structures that traditional lenders will not consider. They are often used by experienced investors with established networks.
The potential risk lies in informality. Poor documentation, unclear expectations, and strained relationships can turn private money into a liability. Professional agreements and clearly defined exit plans are essential.
How to Choose the Best Loan for Your Investment Strategy
The best loan option is the one that aligns with how you envision making money from a purchased property. Buy-and-hold investors typically benefit from stability, predictable payments, and financing that remains viable across market cycles. Short-term investors prioritize speed, flexibility, and access to capital, even when it comes at a higher cost.
Time horizon is also a factor. Loans that are manageable over 12 months can become restrictive over five years. Adjustable rates, balloon payments, and prepayment penalties may work if the exit is defined and realistic.
Cash flow tolerance also shapes financing decisions. Some investors can carry properties that break even or run slightly negative in exchange for appreciation or positioning. Others need immediate income. Loan structure directly affects that reality, often more than purchase price.
Risk tolerance shows up in less obvious ways. Fixed-rate loans trade flexibility for certainty. Short-term or variable loans introduce uncertainty but can unlock opportunities. Problems arise when risk tolerance is assumed rather than defined.
Common Mistakes Investors Make With Financing
Many investors underestimate how much cash is required beyond the down payment. Closing costs, reserves, repairs, and carrying costs add up quickly.
Others prioritize speed over sustainability, choosing expensive financing without a clear exit plan. This can work in rising markets but becomes dangerous when conditions tighten.
Failing to compare lenders is another costly mistake. Rates, fees, and terms vary widely, and small differences compound over time.
There’s No One-Size-Fits-All Loan
There is no universally best loan to buy an investment property. The right choice depends on your strategy, timeline, risk tolerance, and financial profile. Successful investors treat financing as a strategic decision, not a formality.
When guidance isn’t tied to commissions or pressure to close, it becomes easier to choose what actually makes sense. Homa helps buyers and investors evaluate financing options, model outcomes, and move forward with clarity. If you want more control over how you buy and finance investment property, try Homa today.
FAQs
What is the minimum down payment for an investment property?
Typically 15–25%, depending on loan type and lender.
Can you use FHA loans for investment properties?
Only if you occupy the property as your primary residence.
Are interest rates higher for investment property loans?
Yes, because lenders price in higher risk.
What credit score is needed for an investment property loan?
Most lenders require scores in the high-600s or above, though requirements vary.
