Investment Property Loans

A loan for an investment property is a private loan made to a real estate investor for the purpose of purchasing or refinancing a rental home or other income-earning real estate asset. These types of loans are always secured by the investment property itself, generally by a deed of trust. Investors who take these types of loans are generally unable to receive a traditional bank loan or must close quickly and are therefore willing to pay a higher rate of interest and/or contribute more cash at closing than with a traditional bank loan. Due to the higher rate of interest, the borrower will often intend to refinance the loan at a lower rate at some point in the future.

The 1 to 4 unit residential or commercial property is the collateral in an investment property loan. The lender finances the purchase of the property and the improvements or remodeling, if needed. The amount of financing depends on the lender’s loan-to-value requirements. Lenders will lend up to 85 percent of the property’s estimated after-repair value (ARV). In contrast, if a bank is the lender, the property’s current market value, and not improvements, will determine the amount the bank will lend.

Once a property is selected, the lender will review the price, the amount the borrower plans to invest in improvements and the estimated value of the property after improvements or repairs are made. The lender will offer a loan within its loan-to-value limits, specifying an interest rate and repayment period. In some cases, the loan may be divided into tranches, or separate transactions, one for the property purchase and one or more for the property repair and rehab. The borrower agrees to allow the lender to place a lien on the property, allowing the lender to seize the property in case of borrower’s failure to make agreed loan payments.

For fix and flip investment loans, the borrower can repay the loan once the property is improved and sold. For investment properties to be repaired and rented out, a conventional (traditional) mortgage loan will replace the shorter higher-interest hard money or bridge loan.

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Investment Property Loans

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