How to finance an investment property

how to finance an investment property


If becoming a landlord is a dream of yours, you first need to know how to finance an investment property. There are many different ways to buy this investment property, and some of them may even surprise you!



Financing Investment Property Option #1: Keeping the house you live in

If starting a portfolio of investment properties is something you have your eye on, many people achieve this by renting out their house and buying something new.

This is a great option to keep the house you own but may have outgrown.


How does this work? 

Well, all you have to do is buy yourself a new house! You’ve likely had some lifestyle changes since purchasing your home and may need something a little larger. Heck, you may be looking at downsizing! Whatever the reason may be, the house you are currently living in will become your rental property.

Once you’re through inspections on your new home and heading towards closing, I would start advertising your home for rent. This way, you can move out and start collecting rent ASAP.


What to look out for:

Talk with your trusted real estate professional to make sure you can get enough rent to cover your current mortgage on this property. If the potential rent only covers the mortgage and nothing more, this may not be your best option. (You will have expenses on this property beyond the mortgage you’re paying! Water heaters will break, etc.)

Remember that when you’re no longer filing for a homestead exemption on this property, the taxes will be higher.

If you have any vacancies on the property – can you afford the note on this house and the mortgage on your new home? If the answer is no, then let’s explore other options for financing your investment property.


how to finance an investment property


Financing Investment Property Option #2: Buying a single-family home

If you love the house you live in, let’s explore buying a single-family home to start renting out. This is the most common way people start accumulating rental properties.


How much do I have to put down? 

Single-family investment properties require a downpayment of 15% of the purchase price. (It may be 20%, though, as many lenders are not financing investment properties right now!)

If you want to purchase a house for $150k, you must put down $22,500, which does not include closing costs.

Conventional loans are the only option for rental property as well. You cannot finance this investment property using an FHA, RD, or VA loan.


Things to keep in mind:

Ensure that you and your real estate agent know what the neighborhood can demand in rent when you are looking at potential rental properties. Nothing is worse than thinking you can get $2000/month, but you can only rent it for $1200/month.

Factor in the age of major house components like the roof, HVAC, electrical, water heater, and plumbing. If these items need repairs within the next few years, start putting your pennies aside to keep the house maintained.

You don’t want to become one of those landlords who let the house fall into disrepair.


how to finance an investment property


Financing Investment Property Option #3: Buy a multi-family home

Many people love buying a multi-family home for an investment property. A multi-family home has 2-4 units in the building. Anything above that will require you to speak with a commercial lender.


How much money do I need?

If you plan to buy a 2-4 unit property for pure investment purposes, then a conventional loan is your only option. You will need 25% of the purchase price as your down payment, which does not include your closing costs.

Many are also unaware that financial reserves are typically required. The reserve amount will vary, and you will need to speak with your mortgage lender about your specific requirements.


Things to keep in mind

Much like a single-family home purchase, ensure you know how much rental income is realistic. Have your real estate professional pull the most recent rental numbers for the area you’re buying in.

Many multi-family buildings have not been kept in the best of conditions. Be sure you know the ages of major components and monitor what repairs may be needed.

You’ll never find a multi-family unit that doesn’t need repairs—know what you can handle and what you cannot handle.



Financing Investment Property Option #4: Buy multi-family and live there too

The New Orleans dream for many is owning a double. You can live on one half and rent the other. We can also take it a step further and buy a four-plex and rent the other three.


Can I use a VA or FHA loan?

Possibly! Being an owner/occupant of a multi-family home opens up your financing options. You cannot use an RD loan, though. Chat with your local mortgage lender to see if you qualify.

Please note that FHA has loan limits for multi-family homes. Also, if using an FHA or VA loan for financing, the house must be in a certain condition. You cannot purchase a fixer-upper. (If it is only cosmetically outdated, we can work with that!)


Do I still need reserves if I live in the property? 

That answer will also vary. Each person and their financial situation is different. Talk to one of our favorite mortgage lenders to find out.

how to finance an investment property


Financing Investment Property Option #5: Use 15-year loans

The requirements for single-family or multi-family still apply, as discussed above. But if you want to live off rental income later in life – 15-year loans are an awesome option.

Here’s the scenario: you purchase a new rental property every year for X years with a 15-year loan on each. If you’re 40 now, the first house will be paid off at 55. The following house will be paid off when you’re 56, and so on.

If you purchased ten properties over ten years, they would all be paid off by the time you’re 65. Now, your rental income is all yours. (Of course, maintenance costs are still a factor!)


What to keep in mind. 

These 15-year loans will have higher mortgage notes. Your rental income may not cover the entire mortgage. This is a risk you’re taking, but the extra income later on will benefit you greatly if you try to retire early!

Our advice: find cheaper houses to do 15-year mortgages on so you won’t be strapped financially.



Financing an investment property has many layers. Contact us so we can direct you to an amazing local lender! 



If you’re ready to start adding properties to your portfolio, message us now! 



Extra Costs of Owning a Home


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