Conventional Mortgage A conventional lender may also offer a loan that can be used to purchase investment properties, multi-family units, or other types of units. But down payment requirements for investment loans are generally higher with a conventional loan. Four types of loans you can use for investment properties are conventional bank loans, hard money loans, private money loans, and home equity loans. In real estate investing, taking out a conventional mortgage loan is the most common investment property financing option among real estate investors.
You may already have experience with conventional mortgage loans if you own your own home. A conventional mortgage is simply a loan that private entities, such as banks or mortgage brokers, offer for real estate investment purposes. It follows the rules and regulations set by Fannie Mae or Freddie Mac and the federal government does not support this type of loan. FHA & VA loan programs are not eligible for the purchase of investment property.
Compared to hard money loans, conventional mortgages are relatively cheap. However, they are more expensive than loans for owner-occupied properties. In general, you'll likely pay a half to one percent higher interest rate for a conventional real estate investment mortgage. Home equity loans for investment properties are a type of debt that allows homeowners to borrow against the net worth of their home to use in the purchase of a second home or property with income.
In addition, your credit rating and history will determine your approval for conventional mortgage loans for investment properties, as well as the interest rate on your mortgage. While it's possible to use a hard money loan to buy a property and then immediately repay the hard money loan with a conventional loan, private money loan, or home equity loan, starting with one of the other options is more convenient and profitable if you don't intend to invest your property. The main difference is that to get these investment property loans, real estate investors need to have a solid business plan along with a good credit rating. Savvy real estate investors assess the profitability and value after repair (ARV) of target income property before considering these types of investment property loans to ensure they don't end up in a financial bind.
A hard money loan is a short-term loan that is more suitable for investing an investment property rather than buying and maintaining, renting, or developing it. Making a lot of money from investment properties (real estate purchased for the purpose of obtaining rental income or a profit from resale) is rarely as simple as “buying cheap, selling high”. Like hard money loans, it's easier to get approved and get a fixed loan compared to conventional mortgage loans. When opting for these types of investment property loans, an investor in commercial real estate should expect to cover a down payment of around 15% to 35% of the purchase price.