11 Types of Rental Property Loans for Real Estate Investors 

You want to start investing in a rental property, but you don’t have enough funds to start. One great way to start your real estate investment is to use other people’s money and this is what we formally refer to as a rental property loan. In this guide, we’re going to walk you through the 11 types of rental property loans to help you figure out which one fits your needs. Let’s get started. 

Main Takeaways

• Real estate investors have several financing options, including conventional loans, hard money loans, commercial loans, private loans, seller financing, HELOCs, and portfolio loans.
• Not every loan can be used to purchase a standalone investment property. Some government-backed loans have occupancy and property-use requirements that borrowers must meet.
• When comparing rental property loans, consider the interest rate, loan term, down payment, repayment structure, lender requirements, and your long-term investment strategy.

How Does a Rental Property Loan Work? 

As trusted local property management company in Philadelphia, Bay Property Management Group works with rental property owners and real estate investors throughout the area. Rental property loans are like mortgages for buying properties to rent out. Typically, you’ll apply for a loan from a bank or lender specifically for buying a rental property. At first, they will always assess your credit, income, and the property you want to buy. Depending on the financing, you may need to make a down payment, with the required amount varying significantly based on the loan type, lender, property, and borrower qualifications.

But remember, down payment requirements vary depending on the loan type, lender, borrower qualifications, and property.

Most of the time, the larger your down payment, the lower your monthly payments will be. Then, the lender will offer you an interest rate. This is the percentage you’ll pay on top of the loan amount. Rates can be fixed or adjustable (may change over time).  

Next, you’ll agree to the loan terms, including the length of the loan and the payment structure. Loan terms vary significantly depending on the type of financing. The lender will assess the rental property to make sure it’s a good investment. They will look at its value, potential rental income, and condition. 

Once approved, you will start making monthly payments to the lender. These payments cover both the loan amount (principal) and the interest. 

11 Types of Rental Property Loans

Here are the 11 types of rental property loans you can try to apply for as a real estate investor:

1. Federal Housing Administration (FHA) Loan

An FHA loan is a government-insured mortgage designed primarily to help borrowers purchase a principal residence. The FHA does not lend money directly; instead, it insures loans made by approved lenders. FHA financing may be available for properties with one to four units, but at least one borrower generally must occupy the property as their principal residence.

What does this mean? 

This means that if you were to default on your payments, or, for example, you faced a tough situation and you could not pay your loan on time, the FHA mortgage insurance helps protect the lender against losses if the borrower defaults. Because FHA insures the loan against certain losses, approved lenders may offer more flexible qualification requirements than some conventional mortgage programs.

One of the advantages of FHA loans is the lower down payment needed compared to traditional mortgages. With an FHA loan, you may only need to put down as little as 3.5% of the home’s purchase price. This may be lower than the down payment required for some conventional loans.

Another benefit is that FHA loans have more flexible qualification requirements. While you still need to meet certain criteria, like a steady income and a reasonable debt-to-income (DTI) ratio, FHA loans can be easier to qualify for if you have a less-than-perfect credit score. 

Remember: While it is true that FHA loans are flexible, they will require you to pay for mortgage insurance, both upfront and annually. This can actually increase your monthly payments.

2. Department of Veterans Affairs Home Loan (VA) Loans

A VA loan is a mortgage loan available through a program established by the U.S. Department of Veterans Affairs (VA). VA loans may be available to eligible service members, Veterans, and certain qualifying surviving spouses and are backed by the federal government but issued through private lenders. A VA-backed purchase loan can help eligible borrowers purchase a primary residence, often without a required down payment. Eligible borrowers may purchase a property with up to four units and rent out the additional units, but they must meet VA occupancy requirements.

Remember: VA loans are only available to borrowers who meet VA eligibility requirements.

So, if you do not meet VA eligibility requirements, a VA loan will not be an option for you.

3. USDA Loans (USDA Rural Development Guaranteed Housing Loan Program)

USDA Single Family Housing Guaranteed Loans are intended for eligible borrowers purchasing a primary residence in a qualifying rural area. They generally cannot be used to finance a property purchased solely as a rental or investment property. Borrowers must meet USDA income, location, occupancy, and other eligibility requirements.

Remember: USDA loans are not available for everyone. They are aimed at rural homebuyers, so if you are looking to buy in a more urban area, you need to explore other loan or mortgage options.

4. Conventional Loans

Unlike the loans we previously mentioned, a conventional loan is a type of mortgage that is not backed or insured by a government agency. However, conventional loans are available through private lenders.  

Let us say you find a house you want to buy for $200,000. You do not have that much money in your bank account, so you apply for a conventional loan. The lender will look at your financial situation, including your income, credit score, and how much you have saved for a down payment. If they think you are a suitable candidate for a loan, they will agree to lend you the amount you need. 

Now, you do not get the full $200,000 upfront. You usually need to put down a down payment, which is a percentage of the total price of the house. Let us say you put down 20%, which would be $40,000 in this case. That means you’re borrowing $160,000 from the lender. 

Once you’ve got the loan, you must pay it back over time with interest. The lender will set up a payment plan for you, where you will make monthly payments for several years. Typically, conventional loans must be paid within 15 or 30 years.

5. Hard Money Loans

A hard money loan is like a quick-fix loan for real estate investors. It is typically used when you need quick money to buy a property or renovate it. Most real estate investors use hard money loans for a fix-and-flip investment. 

Loans from banks can take a long time to approve. But with a hard money loan, hard money loans may have a faster approval and funding process than traditional mortgages. Unlike a bank loan, where they look at your credit score and financial history, hard money lenders are more interested in the property or collateral itself. They will evaluate the property’s value and its potential to make sure it is a good investment. 

Additionally, because hard money loans are riskier for the lender, they come with higher interest rates and fees compared to traditional loans. They also typically have shorter repayment periods than conventional mortgages, although the exact loan term varies by lender and project. This means you will need to pay back the loan quickly, usually with monthly payments or in one lump sum at the end. 

Many real estate investors use hard money loans for fix-and-flip projects. They buy a property, renovate it quickly to increase its value, and then sell it for a profit. The fast access to cash and short terms make hard money loans a potential financing option for these types of projects.

6. Commercial Loans

A commercial loan is like borrowing money from a bank to buy a house or a building that you plan to use for business purposes, like renting out multiple apartments or opening a store. 

Instead of paying for the whole property upfront with your own money, you now ask the bank to lend you the rest. Then, the bank looks at things like your credit history, your income, and the property itself to decide if they will give you the loan and how much they will allow to lend you.  

So, in simple terms, a commercial loan helps you buy property for your business without having to pay for it all at once, but you must pay back the bank over time with interest.

7. Blanket Loan

Let us say you want to buy many properties all at once. Instead of getting a loan from the bank for each property separately, a blanket loan lets you borrow for all of them together. Instead of juggling multiple loan payments, you only need to make one payment for the entire “blanket” loan. 

Blanket loans can be convenient for investors who want to buy multiple rental properties at once because they simplify the whole borrowing process.  

However, you need to be careful. If the borrower defaults, multiple properties securing the blanket loan may potentially be at risk, depending on the loan terms and applicable law.

Remember:While blanket loans can simplify financing for multiple properties, they may also come with additional risks because several properties can secure the same loan.

8. Private Loans

Private loans are loans offered by individuals or private companies that are not from traditional financial institutions like banks. Instead of borrowing from a bank, you’re getting the money from someone else. This could be a family member, a friend, a colleague, or even a private investment company. Just like any loan, you will have terms to agree upon. This includes the amount of money you are borrowing, the interest rate you’ll pay, and the timeline for repayment. 

To be honest, private loans often offer more flexibility than bank loans. You might negotiate different terms that suit your needs better. Usually, these loans are secured by collateral, which is often the property itself. This means if you are unable to pay back the loan, the lender has the right to take ownership of the property. 

Because of the flexibility, private loans can be quicker to secure than traditional bank loans. Since you’re dealing with an individual or a smaller company, they might not have as much bureaucracy to go through. 

Here’s the risk, though: For the borrower, interest rates might be higher, and if you cannot repay the loan, you might lose your property. For the lender, they are taking on the risk that you might not pay them back.

9. Seller Financing

Seller financing is when the person selling the house becomes your lender. Instead of going to a bank for a loan, you agree directly with the seller. Let’s say the house for sale costs $200,000. You might not have $200,000 in cash to buy it, but the seller agrees to sell it to you and accepts, for example, a $20,000 down payment. 

Then, you agree on the terms for the rest of the money you owe. Instead of borrowing from a bank, the seller loans you the remaining $180,000. You will make regular payments to the seller, just like you would with a bank loan, with an agreed-upon interest rate and timeframe. 

The difference is that with seller financing, you are dealing directly with the person selling the house. It can be a win-win situation because the seller gets to sell their house and potentially make more money over time through the interest you pay, while you get to buy the house without having to go through a traditional bank loan process.

10. HELOC (Home Equity Line of Credit)

A Home Equity Line of Credit (HELOC) is a type of loan that lets homeowners tap into a line of credit based on the equity they’ve built up in their property. Unlike traditional loans, a HELOC works more like a revolving credit line, like a credit card. You can use it for almost any purpose, like investing in rental property. With a HELOC, you can borrow money against this equity whenever needed, up to a certain limit.  

The key thing to understand is that a HELOC works differently from a traditional loan. Instead of getting a huge sum of money upfront, you are given access to a line of credit that you can draw from as needed. And as you pay back what you borrow, you can borrow again, just like how you can reuse a credit card balance as you pay it off. 

Interest rates on HELOCs (Home Equity Line of Credit) can be variable, meaning they can change over time, so it is important to understand the terms of the loan. And remember, since your home is used as collateral, if you cannot repay what you borrow, you could risk losing your home.

11. Portfolio Loans

A portfolio loan is a mortgage that the lender keeps in its own loan portfolio rather than selling on the secondary mortgage market. Because the lender retains the loan, it may have greater flexibility in setting qualification requirements and loan terms.

Because the lender retains the loan, it may have more flexibility to evaluate the borrower, property, and overall financial circumstances than lenders following certain secondary-market requirements. This can be especially helpful if you are investing in multiple properties or if some of your properties might not meet the strict requirements of traditional loans. 

Since portfolio loans are more flexible, they can also come with slightly higher interest rates or require larger down payments compared to traditional loans. 

How to Choose the Right Type of Loan for Your Rental Property 

In choosing the right loan for your rental property, you need to be careful. This is because the loan you pick can have a big impact on how you will manage your finances once you have that rental property. You will need to consider the following: 

• Interest Rate – The interest rate is the amount you will pay the lender for borrowing the money. Ideally, you need to look for a loan with a low interest rate. 
• Loan Term – Loan term is how long you have to repay the loan. Shorter terms mean higher monthly payments but less interest overall, while longer terms mean lower monthly payments but more interest over time. Be careful when negotiating on loan terms, though. 
• Down Payment – This is the amount of money you need to pay upfront. A larger down payment typically means lower monthly payments and less risk for the lender. Consider how different down payment amounts could affect your loan balance, monthly payments, cash reserves, and overall investment strategy.
• Repayment Terms – You need to understand how the loan needs to be repaid. Some loans have fixed monthly payments, while others may have adjustable rates that can change over time. 
• Lender Requirements – Different lenders have different criteria for approving loans. Make sure you meet the lender’s requirements for credit score, income, and property condition before applying. 

FAQs About Rental Property Loans

Choosing a loan for a rental property can be confusing because financing requirements vary by lender, property type, and loan program. Understanding a few basics can help investors narrow down their options before speaking with a lender.

What type of loan is best for a rental property?

There isn’t one loan that’s best for every investor. Conventional loans may work well for borrowers who meet traditional lending requirements, while commercial, portfolio, private, or hard money loans may suit different properties and investment strategies. Compare the total borrowing costs and requirements before choosing.

How much down payment do you need for a rental property?

It depends on the loan program, property, borrower, and lender. Investment-property financing often requires a larger down payment than financing for a primary residence. Instead of assuming one percentage applies to every loan, investors should ask lenders about their specific loan-to-value and down-payment requirements.

Can you use an FHA loan to buy a rental property?

Generally, FHA purchase financing is intended for owner-occupied properties, not a standalone investment property. However, an eligible borrower may be able to purchase a multi-unit property with FHA financing, live in one unit as their primary residence, and rent out the others, subject to FHA requirements. HUD has limited exceptions for FHA financing of non-owner-occupied investment properties.

Can you use a VA loan for a rental property?

A VA-backed purchase loan requires the borrower to live in the home being purchased. Eligible borrowers can use a VA loan to purchase a property with up to four units, provided they meet VA occupancy and other requirements. This can allow someone to occupy one unit and rent the others, but a VA purchase loan isn’t designed simply to buy a property that will be used entirely as a rental.

Can you use a HELOC to buy a rental property?

Potentially, yes. A homeowner may use funds available through a HELOC toward another real estate investment, subject to the HELOC’s terms and lender requirements. However, because the existing home generally secures the HELOC, failing to repay the debt can put that property at risk. The article already explains this risk well.

What should investors compare when choosing a rental property loan?

Look beyond the interest rate. Investors should compare the required down payment, loan term, closing costs and fees, repayment structure, qualification requirements, and how the financing affects expected rental cash flow.

How Bay Property Management Group Can Help 

Let us say you successfully got the loan you need to start your rental property investment. Now, you must understand that this is the beginning. You now have key responsibilities such as managing your property, your tenants, and your finances. It might be a struggle for you to juggle all the property management responsibilities that come with your rental property. 

We want to let you know that Bay Property Management Group is here to help. Our local experts will handle all your property needs. With our local knowledge and resources, we can help you streamline all your rental operations. Contact us to learn more about how our services can help you reduce the stress associated with managing your rental properties.