A Quick Guide to Investment Property Loans and Mortgages

When it comes to real estate investing, understanding how to finance a deal is just as important as finding the right property. Unfortunately, many independent landlords struggle to secure real estate financing at competitive rates in today’s market — simply because they aren’t aware of the different avenues available. 

The truth is, there’s no one-size-fits-all approach to financing investment properties. “The best thing you can do as an investor is educate yourself on the different types of financing,” advised Torri Shack, Head Of Mortgage Solutions at Azibo. “That way, when you get to the table you will know what you’re talking about and what your options are.” 

In this blog post, we’ll break down different financing options for investment properties, what they’re used for, and how you can position yourself as the best loan applicant possible.

Popular mortgage types 

As a real estate investor, it’s important to carefully consider which path makes the most sense for your specific financial situation. First, let’s start with loans for buying or refinancing an investment property. Here are some of the most common types:

• Acquisition loans are granted to help real estate investors purchase a new property. Many investors turn to conventional bank mortgages to complete their real estate transactions, since securing a mortgage from a traditional lending institution often leads to the lowest interest rates and fees. Even so, landlords can expect the interest rate on their investment property to be at least .50% to .75% higher than the rate on their primary residence mortgage, since lending institutions consider real estate loans to be a riskier product.
• Bridge loans are a short-term financing option that can serve as a source of funding until you secure permanent financing. On average, these loans last ​​from about six months to one year, but can be paid off later depending on your arrangement. These loans are popular for “fix-and-flip” home buying strategies, where investors purchase a home, renovate it, then sell it at a profit in a short amount of time. This loan type allows borrowers to get access to cash flow while they’re still paying off other obligations, but comes with risk — for example, if your fix-and-flip property doesn't sell by the time you need to begin repaying your bridge loan, you’re still responsible for the debt.
• Refinancing loans help investors change their existing mortgage terms based on their financial goals — allowing you to potentially get a better interest rate, pay your mortgage off faster by shortening the terms, or lower your monthly payments. If you’re looking to increase your cash flow for a home improvement project, one refinancing option to consider is a cash-out refinance. This enables you to take out a new mortgage for more funds than you owe on an existing one, then convert home equity into cash.

Note that while you can apply for certain loans, you can’t always control the specifics around the terms (e.g., whether it’s a 15- or 30-year mortgage) unless you’re willing to sacrifice your ideal interest rate. “The loans you’re offered are based on your net worth, your credit score, the property itself, and many other factors,” explained Torri. “Your lender will provide a few options for rates and terms based on your application, then you choose which of those options works best for you.”

Short-term working capital options 

Working capital financing may be ideal for investors who need money to cover day-to-day operational expenses, like completing home renovations or major repairs. However, it’s important to note that the vast majority of short-term real estate loans get rejected by banks — so investors often must explore alternative routes, such as hard money lenders.  

Below are six working capital financing options to consider:

1. Streamline financing with Azibo Rent Advance

Designed to secure landlords fast funding, Azibo Rent Advance allows Azibo landlord customers to get up to 60% of their annual rental income now and pay it back in 12 equal monthly installments. (Currently only available to eligible customers.)

2. Get affordable home improvement loans with LoanGlide

Azibo partnered with LoanGlide to give customers access to fast, flexible short-term home improvement loans that range from ​​$1,000 to $100,000. LoanGlide offers simplified online applications, the ability to get funding in as fast as 24 hours, and affordable payment plans with variable interest rates and terms to meet every need.  

Discover LoanGlide

3. Take out a second mortgage for an existing property

Second mortgages allow real estate investors to borrow against the equity of another property in their portfolio. Landlords can then use the cash for renovations, home improvements, or any way they see fit.

4. Take out a line of credit on your primary residence

A home equity loan lets real estate investors borrow against the available equity in their primary residence and use the house as collateral for a line of credit.  

5. Consider alternative lenders

Looking beyond traditional institutions like banks and credit unions, you could seek out funding from alternative lenders, or “hard money” lenders, which are typically online-based, private companies. However, it’s important to thoroughly vet alternative lenders since they can be predatory and may require extraordinarily high interest rates.

6. Use your credit card

Finally, some landlords may consider charging home improvement costs to their credit card. This can be another quick solution — however, it’s essential to understand your credit limit and utilization as well as confirm you can pay back charges on time and in full. 

How to position yourself as the best loan applicant

Wondering what you can do to make a great first impression on potential lenders? Here are three tips for inspiring confidence in your application:

• Boost your credit score. When it comes to credit scores, the higher the better. Experts recommend having a credit score of 620 or higher when applying for a conventional loan. Meanwhile, a score of 740 or higher can qualify you for lower down payments and lower interest rates.
• Put at least 20% down. In a survey by the National Association of Realtors, realtors reported that 48% of their home buyer clients made down payments of at least 20% in the first quarter of 2021. And for good reason: putting down 20% or more increases your likelihood of loan approval by assuring lenders that you’re on solid financial ground. It can also help you secure a lower monthly payment and lower interest rate. 
• Have sufficient cash reserves. Requiring cash reserves is a way for lenders to minimize their risk and maximize returns. As The Mortgage Reports explains, “​​Lenders like to see emergency funds that can pay your housing expenses even if your income stops.” Sufficient cash reserves give lenders confidence that nothing will get in the way of you meeting your financial obligations — not a pay cut, sudden layoff, or a medical emergency. According to My Mortgage Insider, six ​​months’ worth of cash reserves are typically required to qualify for investment property mortgages.
• Demonstrate the potential for positive cash flow. For investment property loans, it’s important to demonstrate that your rental property has equity, or will be cash flow positive within about six months after purchase. Show the bank the property’s existing tenants’ rent history, or if it is currently unoccupied, calculate your property’s projected cash flow based on estimated rental income and expenses. 
• Avoid major financial changes. Lenders like to see stability, so don’t make any major financial changes — positive or negative — ahead of your loan application. “Don’t make any large purchases, don’t transfer in and out large amounts of money, and make sure your bank account has seasoned assets in it — not just cash you got yesterday,” Torri recommended. 

What you need before applying for a loan

No one loves paperwork, but it’s an unavoidable — and crucial — part of real estate financing. While application requirements vary by lender, investors should be prepared to provide the following property information:

• Property address, including city, state, zip code, and county 
• Number of rental units
• Number of bedrooms and bathrooms
• Year built
• Acquisition date
• Price of property
• Appraisal value
• Rehab costs
• Borrower opinion
• Current property value
• Leasing information
• Monthly rent details
• HOA dues
• Taxes and insurance costs
• Current loan balance and rate (for refinance loans)

Beyond that, you’ll also need to submit basic information about yourself and your financials. That includes your credit score, income statements, cash flow statements, tax returns, and LLC details (if applicable). 

Applying for a real estate loan may feel overwhelming, but staying organized and proactively tracking down paperwork ahead of the time of application can help make the process as smooth as possible — and leave a strong impression on potential lenders.