6 Types of Loans for Investment Properties in Real Estate

Unlike primary residences, investment properties are acquired with the explicit goal of generating income, appreciation, or both. Consequently, the financing tools used for these ventures often differ significantly from traditional home mortgages. Lenders assess investment property loans with a keener eye on the property’s income potential and the borrower’s global financial picture, rather than solely on personal income and debt-to-income ratios. The right loan can unlock opportunities, allowing investors to leverage capital and expand their portfolios more rapidly than through cash purchases alone.

Conventional loans are the most common type of financing for real estate, often originating from banks, credit unions, and independent mortgage lenders. While similar to primary residence mortgages, they come with distinct characteristics for investment properties.

How They Work: These loans are not backed by government entities (like FHA or VA) and adhere to guidelines set by Fannie Mae and Freddie Mac. For investment properties, borrowers typically require a higher down payment—often 20% to 25% or more—compared to 5-10% for owner-occupied homes. Interest rates for investment property conventional loans are generally higher than owner-occupied loans due to the perceived increased risk. Lenders also look for strong credit scores (typically 680+) and sufficient reserves (often 6 months of mortgage payments) to ensure the borrower can handle vacancies or unexpected expenses.

Benefits: They offer competitive interest rates relative to other investment property financing options, predictable monthly payments, and a wide array of lenders, making them accessible. They also provide the flexibility of various loan terms, such as 15-year or 30-year fixed-rate mortgages.

Use Case: Ideal for seasoned investors with strong credit and sufficient down payments who are purchasing stable, income-generating properties like single-family rentals or small multi-family units (up to 4 units).

When an investment property consists of more than four residential units or is explicitly commercial in nature (e.g., office buildings, retail spaces, warehouses), conventional residential financing no longer applies. Instead, investors turn to commercial real estate loans.

How They Work: These loans are provided by banks, credit unions, and life insurance companies, and they are significantly different from residential mortgages. Commercial loans often have shorter terms (5, 7, 10, or 20 years with a balloon payment at the end), higher interest rates, and loan-to-value (LTV) ratios typically ranging from 65% to 80%. Lenders focus heavily on the property’s net operating income (NOI) and debt service coverage ratio (DSCR) to ensure the property itself can generate enough income to cover the mortgage payments.

Benefits: They cater to larger and more complex investment opportunities not covered by residential financing. They can be structured with more flexibility regarding repayment schedules and terms to fit specific project needs.

Use Case: Essential for acquiring larger multi-family complexes (5+ units), commercial properties, or mixed-use developments that blend residential and commercial spaces.

Portfolio loans are unique in that the lender keeps the loan in their “portfolio” rather than selling it on the secondary market to entities like Fannie Mae or Freddie Mac. This allows for greater flexibility in underwriting.

How They Work: Because these loans bypass the rigid guidelines of conventional financing, lenders can set their own terms, interest rates, and qualification criteria. This often means they are more willing to work with borrowers who have unconventional income streams, slightly lower credit scores, or properties that don’t fit standard molds (e.g., properties needing significant rehabilitation, or properties with unique zoning). While they offer flexibility, interest rates can be slightly higher than conventional loans, and they may require a stronger relationship with the lending institution.

Benefits: Ideal for “difficult-to-finance” scenarios, complex investment strategies, or for borrowers seeking a more customized lending solution. They can streamline the process for multiple properties with the same lender.

Use Case: Suited for investors building out a substantial portfolio who prefer to consolidate their loans with one lender, or those dealing with properties that present specific challenges that conventional lenders shy away from (e.g., non-warrantable condos).

Hard money loans are a form of asset-based lending, primarily secured by the real estate itself rather than the borrower’s creditworthiness. They are typically short-term and provided by private individuals or companies.

How They Work: These loans are characterized by rapid approval and funding processes, making them highly attractive for time-sensitive deals. However, this speed comes at a cost: significantly higher interest rates (often 8-15% or more) and substantial origination fees (2-5% of the loan amount). Terms are short, usually 6 months to 3 years, with interest-only payments, and a balloon payment at maturity. Lenders focus on the loan-to-value (LTV) of the property (often 60-75% of the after-repair value, ARV) more than the borrower’s credit score.

Benefits: Quick access to capital, less stringent credit requirements, and flexibility on property condition. Essential for flip projects where speed is critical to securing a good deal.

Use Case: Primarily used for “fix-and-flip” strategies, distressed property acquisitions, bridge financing between projects, or situations where conventional financing is not feasible due to the property’s condition or the urgency of the deal.

Similar to hard money loans, private money loans originate from individuals or small groups of investors rather than institutional lenders. The distinction often lies in the source and the relationship.

How They Work: Private money loans usually come from an investor’s personal network—friends, family, or other real estate investors. Terms are highly negotiable, reflecting the personal nature of the agreement. They can be more flexible than hard money loans regarding interest rates, repayment schedules, and property types, as they are not driven by the same profit motives as professional hard money lenders. Trust and the relationship between the borrower and lender play a significant role.

Benefits: Highly customizable terms, potentially lower interest rates than hard money (depending on the relationship), and often a faster closing process than traditional loans. Can be secured by properties that institutional lenders would avoid.

Use Case: Ideal for new investors building their initial projects, or for experienced investors who have cultivated strong relationships within the real estate community and need flexible, rapid funding for specific, often short-term, projects.

While not direct investment property loans, a Home Equity Line of Credit (HELOC) or a Home Equity Loan on an investor’s primary residence (or another unencumbered property) can serve as crucial financing for investment property acquisitions.

How They Work: A HELOC functions much like a credit card, allowing the homeowner to borrow against the equity in their primary residence up to a certain limit, using funds as needed. Interest is only paid on the borrowed amount. A Home Equity Loan provides a lump sum payment. Both are secured by the borrower’s primary residence. The interest rates are typically lower than those for investment property specific loans because they are secured by an owner-occupied property, which is considered less risky by lenders.

Benefits: Lower interest rates, flexible access to capital (HELOC), and ability to leverage existing equity without selling the primary residence. Can be used for down payments, closing costs, or even full cash purchases of investment properties.

Use Case: Effective for investors who have substantial equity in their primary residence and want to avoid, or reduce the size of, an investment property loan. It can also be used as a source of funds for property renovations or as a reserve fund. However, it’s critical to understand the risk: defaulting could jeopardize the primary residence.

The landscape of real estate investment financing is diverse, offering a range of options to suit various strategies, property types, and investor profiles. From the stability of conventional loans and the breadth of commercial financing to the speed of hard money and the flexibility of private capital, each loan type serves a distinct purpose. Understanding these options, their advantages, and their typical use cases empowers investors to make informed decisions, optimize their capital, and ultimately achieve their real estate investment goals with greater precision and success. Carefully assessing individual financial situations, property characteristics, and investment objectives is crucial in selecting the most fitting financing solution.