How To Borrow Money for Investment Property: Top 10 Borrower Questions & Mistakes (2024)

FAQs

Is it easier to get a loan for an investment property? ›

Check Investment Property Loan Requirements

Investment property mortgages typically have stricter requirements than mortgages for primary residences due to their higher risk of foreclosure and default. Most fixed-rate mortgages require at least a 15% down payment with a 620 credit score for an investment property.

By using borrowed capital, investors can control larger assets with a smaller upfront investment. This means that even with a minimal amount of your own money, you can reap the benefits of a property's appreciation. For instance, a 20% down payment on a property allows you to control 100% of its value.

The only time when it really makes sense to borrow money for an investment—known in financial lingo as “investing a loan”—is when the return on investment (ROI) on the prospective investment is high and the level of risk is low.

You can end up losing money

Whether your investments make money or not you will still have to pay back the loan plus interest. You may have to sell other assets or use money you had set aside for other purposes to pay back the loan. If you used your home as security for the loan, you may lose your home.

The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.

You'll need a minimum credit score of 640 for an investment property mortgage, although the requirement may jump to 700 or higher if you're buying a multifamily home.

If you're interested in residential real estate investing, you may have heard of the BRRRR method. The acronym stands for Buy, Rehab, Rent, Refinance, Repeat. Similar to house-flipping, this investment strategy focuses on purchasing properties that are not in good shape and fixing them up.

The debt service coverage ratio (DSCR) is a simplified calculation of rental property cash flow. It takes a property's projected or historical income from yearly rents over the property's PITI debt obligations (principal, interest, taxes, insurance – and HOA fees if the property has any).

Between 70% and 80% of your equity is considered safe leverage. For example, between $70,000 and $80,000 of $100,000 in equity is considered safe to leverage. This is because your property could potentially depreciate and harm your equity.

Step 2: Borrow Against Assets

Wealthy family borrows against its assets' growing value and uses the newly available cash to live off or invest in other assets, like rental properties. The family does NOT owe taxes on its asset-leveraged loans because the government doesn't tax borrowed money.

What are the disadvantages of borrowing to invest? ›

The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.

1. Debt Accumulation: One of the primary dangers of borrowing money is the risk of accumulating debt. While loans can provide short-term relief, the long-term consequences of piling up debt can be financially crippling.

Debt can be used as leverage to multiply the returns of an investment but also means that losses could be higher. Margin investing allows for borrowing stock for a value above what an investor has money for with the hopes of stock appreciation.

Unlike a loan, an investment denotes a degree of ownership or stake in the venture, and the investor may share in the profits or losses. LOAN - In a loan, the lender does not gain ownership or control over the borrower's business. The lender is entitled to repayment of the principal amount and interest only.

A 20% down payment can be avoided by considering alternative financing options like group investing. But most investors will need to find a way to put down at least 20% on their investment property purchase. If your credit score is 680 or higher, you may be able to put down a minimum of 15%.

Maximum loan-to-value (LTV) ratio: 75 percent. Reserves: six months' to 15 months' worth of home equity loan payments.

THE 25-40 AGE BRACKET

We're building skills and experience in the workforce and at the same time, having a family, purchasing our first home and acquiring the things we need (or think we need) to move through life successfully.

Real estate is a challenging business that requires knowledge, talent, organization, networking, and perseverance. Becoming knowledgeable and educated about the real estate market is crucial, but this often requires more than just in-class learning.