How to finance an investment property: a guide for real estate investors

What are the ways to finance a rental property?

• Conventional investment loans follow Fannie Mae or Freddie Mac rules. They qualify you on your personal income, debts and credit. Rental income counts under specific rules.
• DSCR loans are Non-QM loans (loans outside the standard Fannie/Freddie and government rules). They qualify mainly on the property's rent compared with its full monthly payment, usually without proof of your personal income.
• Other Non-QM and portfolio programs include bank statement, asset-based and specialty investor loans, each with its own rules.
• Buying a multi-unit you'll live in. If you'll live in one unit of a two- to four-unit property, conventional, FHA and VA loans can be options, because it's your primary home. That's a different set of rules than a pure investment purchase.

How do conventional investment property loans work?

How is rental income counted for a mortgage?

For a purchase, Fannie Mae's Selling Guide (B3-3.8-02) has the lender start with the gross monthly rent. That rent is documented with the appraiser's rent schedule (Form 1007 for a single unit, or Form 1025 for two to four units) and any existing lease. The lender multiplies it by 75% to get net rental income. In other words, the lender never counts the full rent.

The lender then subtracts the property's full PITIA (principal, interest, taxes, insurance and association dues). What happens next depends on your experience:

• 12 or more months of property management experience: a positive result can be added to your qualifying income. A negative result counts as a debt.
• Less than 12 months: a positive result can only offset the property's own PITIA. A negative result still counts as a debt.

For rentals you already own, lenders generally use your tax returns (Schedule E) to figure rental income. Leases are allowed in specific situations described in Fannie's guidance (B3-3.8-01).

How many financed properties can you have?

Fannie Mae limits how many financed properties you can have when buying or refinancing a second home or investment property. Under B2-2-03, the maximum through Desktop Underwriter (Fannie Mae's automated approval system) is 10 financed properties, counting your own home.

Reserves

Reserves are savings you have left after closing. Fannie's reserve guidance (B3-4.1-01) calls for reserves on an investment property loan, plus more based on the unpaid balances of your other financed properties: 2% of the total balance for one to four financed properties, 4% for five to six, and 6% for seven to ten. DU may require more based on its overall risk review.

How much do I need for a down payment on an investment property?

Investment properties require noticeably more equity than a home you live in. Conventional pricing also includes loan-level price adjustments (pricing add-ons) for investment properties. The exact requirements depend on the property type, the transaction and your credit.

What is a DSCR loan?

A DSCR (debt service coverage ratio) loan looks at the property instead of you:

A ratio above 1.00 means the rent covers the full payment. Programs set their own minimums and pricing tiers. Some allow ratios below 1.00 with more equity and reserves. Your personal tax returns usually aren't part of the math, and your other rentals generally aren't counted against a personal DTI.

The trade-offs: DSCR loans generally cost more than conventional loans. Prepayment penalties (fees for paying off early) are common. And rules vary a lot between investors. Run your numbers in the DSCR calculator, and read my full DSCR loan guide for the details.

How do cash-out refinancing and delayed financing work for rentals?

Pulling equity from one property to buy the next is a core investor strategy. Conventional rules (Fannie Mae B2-1.3-03) include:

• Ownership seasoning (how long you've owned it): at least one borrower generally must have been on title for six months before the new loan pays out, with listed exceptions.
• Existing loan seasoning: a first mortgage being paid off generally must be at least 12 months old, measured note date to note date.
• Listed properties: a property listed for sale must be taken off the market on or before the day the loan pays out.
• LLC-owned properties: time held in an LLC that the borrower majority-owns or controls can count toward seasoning. But ownership must be moved into the individual borrower's name to close.

Delayed financing: buy with cash, get it back quickly

Fannie Mae's delayed financing exception lets you do a cash-out refinance on a property you bought with cash in the past six months, without waiting the normal time. Key requirements include:

• An arms-length purchase (between unrelated parties)
• A settlement statement showing no mortgage was used
• Documented sources of the purchase money
• A new loan amount no more than your documented initial investment plus financed closing costs, prepaids and points, subject to LTV (loan-to-value) limits

If the purchase money came from a loan, the cash-out money must pay it off. Purchases paid for with gift money can't be paid back this way.

Non-QM and DSCR programs set their own seasoning and delayed financing rules, which can differ from Fannie's.

Can you get a mortgage for a short-term rental (Airbnb)?

Yes, short-term rentals can be financed. But they're reviewed differently than a standard lease. Depending on the loan, qualifying income may come from:

• Your tax returns showing the property's history
• A booking history
• A third-party market data report
• Long-term market rent only

Rules vary a lot, and agency rules for counting short-term rental income are specific. So I confirm the current treatment for your exact file.

Before buying, check local ordinances, permit requirements and HOA or condo rules. A loan can be approved and a city rule or covenant can still block the plan you had. On the Gulf Coast and in Florida, get real wind and flood insurance quotes early, since they go straight into your payment.

Can you get a mortgage in an LLC?

Many investors want to hold rentals in an LLC for liability and organization reasons. Here's how that affects financing:

• Conventional loans are made to individuals. Fannie Mae's borrower eligibility rules (B2-2-01) require borrowers to be natural persons (real people), with limited exceptions such as certain revocable trusts. They don't list LLCs as eligible borrowers.
• DSCR and many Non-QM programs commonly lend to an LLC. They usually require a personal guarantee from the members and a review of the LLC's formation documents.
• Moving title after closing can raise questions under your loan documents. Ask before you deed a financed property into an entity.

Whether an LLC makes sense for you is a legal and tax question, so loop in your attorney and CPA.

Which investment property loan is right for you?

How do you know if a rental property is a good deal?

A loan approval doesn't mean the investment works. Before an investor signs a contract, I walk through:

1. Real property taxes. The seller's bill may include a homestead exemption or older assessment you won't get. In Georgia, homestead exemptions apply to owner-occupied homes, not rentals.
2. Real insurance quotes, including wind and flood where needed.
3. Conservative rent. Use what the appraiser is likely to support, not the best-case guess.
4. Vacancy and turnover. Budget for empty months, cleaning and leasing costs.
5. Repairs and big-ticket items. Roofs, HVAC and water heaters don't care about your spreadsheet.
6. Management. Even if you manage it yourself today, price in a manager so the deal still works if you hand it off.
7. Reserves. The lender's minimum isn't your comfort level. Keep enough to ride out a bad stretch.
8. Exit plan. If you might sell or refinance within a few years, count prepayment penalties and transaction costs.

Common questions about this topic

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