Financing Your First Investment Property: All Options Explained

Financing an investment property is fundamentally different from buying a primary residence. Lenders view rental properties as riskier, which means stricter requirements, higher interest rates, and larger down payments. But understanding all your financing options—from conventional loans to creative strategies—can mean the difference between sitting on the sidelines and closing your first deal.

This comprehensive guide breaks down every financing method available to first-time real estate investors, complete with pros, cons, requirements, and real-world scenarios to help you choose the right approach for your situation.

Understanding Investment Property Lending Basics

Before diving into specific loan types, let's establish why [investment property financing](/blog/dscr-vs-hard-money-loans) differs from primary residence loans.

Why Lenders Treat Investment Properties Differently

Higher risk profile: Borrowers prioritize their primary residence during financial hardship. If money gets tight, they'll pay their home mortgage before an investment property.

Income variability: Rental income isn't guaranteed. Vacancies, non-paying tenants, and market fluctuations create uncertainty.

Default statistics: Historically, investment properties have higher default rates than primary residences.

Key Differences to Expect

• Down payments: 15-25% vs. 3-5% for primary homes
• Interest rates: 0.5-0.75% higher
• Credit score requirements: Typically 620 minimum, 740+ for best rates
• Cash reserves: 6-12 months of payments required
• Debt-to-income ratio: More stringent qualification (usually 43% max DTI)

Option 1: Conventional [Investment Property Loans](/blog/best-dscr-lenders-2026)

Conventional loans through Fannie Mae or Freddie Mac are the most common financing method for investment properties.

Requirements

• Down payment: 15-25% (20% is standard)
• Credit score: 620 minimum; 740+ for best rates
• Cash reserves: 6+ months of PITI (principal, interest, taxes, insurance)
• Debt-to-income ratio: Typically 43% or lower
• Property limit: Fannie Mae allows up to 10 financed properties

How Rental Income Is Counted

Lenders can use projected or actual rental income to offset the property's PITI:

• Existing leases: Use 75% of documented rent
• No existing lease: Use 75% of appraiser's market rent estimate

The 25% haircut accounts for vacancies and expenses.

Pros

• Competitive interest rates (for investment loans)
• Clear qualification guidelines
• Can finance up to 10 properties
• 30-year fixed terms available
• No prepayment penalties

Cons

• Significant down payment required
• Stricter qualification than primary residence loans
• Higher rates than owner-occupied financing
• Cash reserves requirement ties up capital

Best For

Investors with stable W-2 income, strong credit, and sufficient savings for 20%+ down payment.

Real-World Example

Sarah earns $80,000/year and has $60,000 saved. She finds a $240,000 duplex that generates $2,400/month in rent. With 20% down ($48,000), she gets a conventional loan at 7.25%. The lender counts 75% × $2,400 = $1,800 toward qualification, which helps offset the mortgage payment and improves her debt-to-income ratio.

Option 2: FHA House Hacking (Owner-Occupied Multifamily)

The FHA loan isn't technically an [investment property loan](/blog/dscr-loan-for-single-family), but it's one of the most powerful strategies for new investors with limited capital.

How It Works

Buy a 2-4 unit property, live in one unit, rent out the others. Because you're owner-occupying, you qualify for FHA financing terms.

Requirements

• Down payment: As low as 3.5%
• Credit score: 580 minimum (620+ recommended)
• Property: Must be 1-4 units; you occupy one for at least 12 months
• Mortgage insurance: Required (both upfront and monthly)
• Debt-to-income ratio: Generally 43% max, though 50%+ possible with compensating factors

How Rental Income Is Counted

Lenders will use 75% of market rent from the non-occupied units to help you qualify, even if you don't have lease agreements yet.

Pros

• Minimal down payment (3.5%)
• Lowest barrier to entry for multifamily investing
• Live rent-free or significantly reduced while building equity
• Can repeat every 12 months (move to new property)
• Rental income helps qualification

Cons

• Must live on-site for 12 months
• Mortgage insurance adds to monthly cost (can't remove until 11 years or refinance)
• Property condition must meet FHA standards (no major repairs needed)
• Loan limits vary by county (may restrict property options in high-cost areas)

Best For

First-time investors willing to live in a multifamily property, especially those with limited savings but steady income.

Real-World Example

Marcus has $15,000 saved and earns $65,000/year. He buys a $300,000 triplex with 3.5% down ($10,500). He lives in one unit and rents the other two for $1,200 each. The $1,800 [monthly rental income](/blog/best-cities-for-cash-flow-2026) (75% of $2,400) helps him qualify and covers most of his mortgage payment, allowing him to live almost rent-free while building equity.

Option 3: Portfolio Loans from Local Banks and Credit Unions

Portfolio loans are kept on the lender's books instead of being sold to Fannie Mae or Freddie Mac, giving them flexibility in underwriting.

How They Work

Local and regional banks create their own lending criteria. They can bend conventional rules for borrowers with unique situations or strong banking relationships.

Common Terms

• Down payment: 15-30% (varies widely)
• Credit score: 660-700+ typically
• Interest rates: Often 0.25-0.5% higher than conventional
• Loan structure: May offer interest-only periods, shorter terms (15-20 years), or adjustable rates
• Relationship required: Often prefer existing banking customers

Pros

• Flexible underwriting (can consider non-traditional income)
• Willing to finance properties conventional lenders reject
• Faster approval and closing
• Relationship-based lending (knowing your banker helps)
• May finance unique properties (non-warrantable condos, mixed-use, etc.)

Cons

• Higher interest rates
• Balloon payments common (loan due in 5-10 years)
• Fewer consumer protections
• May require full banking relationship (checking, savings, etc.)
• Terms vary wildly between institutions

Best For

Self-employed investors, those buying unique properties, or borrowers with strong local banking relationships who value flexibility.

Real-World Example

David is self-employed and his tax returns show lower income due to write-offs. Conventional lenders deny him. His local credit union, where he's banked for 15 years, offers a portfolio loan with 25% down, 7.75% interest, and a 10-year balloon. The higher rate is offset by his ability to actually get approved.

Option 4: Hard Money Loans

Hard money loans are short-term, asset-based loans from private lenders. They focus on the property's value, not your credit or income.

How They Work

Hard money lenders loan based on after-repair value (ARV) of the property, typically 65-75% of ARV. Loans are typically 6-24 months with the expectation you'll refinance or sell.

Typical Terms

• Down payment: 25-35% of purchase price
• Interest rates: 8-15%
• Points: 2-5 points upfront (1 point = 1% of loan amount)
• Term: 6-24 months
• Credit requirements: Minimal (some lenders don't check credit)

Pros

• Fast approval (days, not weeks)
• Credit and income matter less
• Can fund distressed properties banks won't touch
• Enables fix-and-flip or BRRRR strategies
• Closing speed can win deals in competitive markets

Cons

• Expensive (high rates + points)
• Short-term only (must have exit strategy)
• Lower loan-to-value (need more cash)
• Risky if project goes over time/budget
• Not suitable for traditional buy-and-hold unless bridging to refinance

Best For

Experienced investors doing fix-and-flip or BRRRR (Buy, Rehab, Rent, Refinance, Repeat); not recommended for first-timers unless paired with experienced mentor.

Real-World Example

Jamie finds a distressed property for $150,000 that needs $40,000 in repairs. After rehab, it's worth $250,000. A hard money lender loans 70% of ARV ($175,000), covering purchase and most of repairs. Jamie pays 12% interest and 3 points for 12 months, completes renovations, rents it out, then refinances into a conventional loan at a lower rate.

Option 5: [Cash-Out Refinance](/blog/cash-out-refinance-guide)

If you already own your primary residence and have equity, a cash-out refinance can fund your investment property purchase.

How It Works

Refinance your primary residence for more than you owe, taking the difference in cash. Use those funds for your investment property down payment.

Requirements

• Equity required: Typically can borrow up to 80% of home value
• Credit score: 620+ (740+ for best rates)
• Debt-to-income: Must qualify with new higher payment
• Seasoning period: Usually need to own home 6+ months

Pros

• Access equity without selling
• Primary residence rates (lower than investment property)
• No restrictions on how you use the cash
• Can pull significant capital from one property

Cons

• Increases payment on your primary residence
• Reduces equity cushion in your home
• Closing costs (2-5% of loan amount)
• Puts your primary residence at higher risk
• Must qualify with new higher payment

Best For

Homeowners with significant equity who want to keep their current home while investing in rental properties.

Real-World Example

Lisa owns a home worth $400,000 with a $200,000 mortgage. She does a cash-out refinance to $320,000 (80% LTV), netting $120,000 after paying off her existing loan. She uses $60,000 for a down payment on a rental property and keeps $60,000 for repairs and reserves.

Option 6: [Home Equity Line of Credit](/blog/best-heloc-lenders-2026) (HELOC)

A HELOC is a revolving line of credit secured by your primary residence's equity.

How It Works

Similar to a credit card secured by your home. Borrow as needed up to your credit limit, pay interest only on what you use.

Typical Terms

• Credit limit: Up to 80-90% combined loan-to-value (CLTV)
• Interest rates: Variable, typically prime + 0.5-2%
• Draw period: 5-10 years (borrow as needed)
• Repayment period: 10-20 years after draw period ends
• Credit score: 680+ typically

Pros

• Only pay interest on what you use
• Flexible access to capital
• Can reuse as you pay down (revolving)
• Lower closing costs than cash-out refinance
• Interest may be tax-deductible if used for home improvements

Cons

• Variable interest rates (can increase)
• Requires equity in primary residence
• Puts your home at risk
• Some lenders freeze or reduce lines during market downturns
• May need to pay off or reduce before selling your home

Best For

Investors who want flexible access to capital for down payments, repairs, or opportunities, and can manage variable-rate debt responsibly.

Real-World Example

Tom has $150,000 in equity and opens a $100,000 HELOC. He uses $50,000 for a down payment on a rental property. As he pays down the HELOC from rental income, that capital becomes available again for his next property.

Option 7: Seller Financing

In seller financing, the property owner acts as the bank, allowing you to make payments directly to them instead of getting a traditional mortgage.

How It Works

Negotiate terms directly with the seller: down payment, interest rate, term length, and payment schedule. The deed transfers to you, but the seller holds a lien until paid off.

Typical Terms

• Down payment: 10-30% (negotiable)
• Interest rates: 6-10% (negotiable)
• Term: 3-10 years with balloon payment common
• Credit requirements: Seller's discretion

Pros

• Flexible terms (everything is negotiable)
• Faster closing (less documentation)
• Possible with poor credit or income issues
• Lower closing costs
• Creative deal structures possible

Cons

• Balloon payments often required (must refinance)
• Seller must own property free and clear (or have assumable loan)
• Less consumer protection than traditional mortgages
• Due-on-sale clauses may apply if seller has existing mortgage
• Finding willing sellers can be difficult

Best For

Investors with unique circumstances (low credit, self-employed, foreclosure on record) or when buying from motivated sellers (retirement, relocation, inheritance).

Real-World Example

An elderly couple wants to retire and sell their $200,000 rental property (paid off). You offer $210,000 with $40,000 down, 7% interest, monthly payments of $1,242, with the balance due in 5 years. This gives them steady income, and you get financing you might not otherwise qualify for.

Option 8: Partner Equity

Bring in a money partner who provides capital in exchange for equity ownership.

How It Works

You find and manage the deal; your partner provides some or all of the capital. Profits and equity are split according to your partnership agreement.

Typical Structures

• 50/50 split: Equal capital and work contribution
• 70/30 split: Partner provides capital (70%), you provide work and expertise (30%)
• Preferred return: Partner gets guaranteed return (e.g., 8%) before profits are split

Pros

• Overcome capital limitations
• Leverage other people's money (OPM)
• Share risk with partner
• Can do larger or more deals
• Learn from experienced partners

Cons

• Give up equity and control
• Potential for partnership conflicts
• Requires clear legal agreements
• Profits are shared
• Partner may have different goals or risk tolerance

Best For

New investors with deal-finding ability but limited capital; those wanting to learn from experienced investors; accessing deals too large for solo investment.

Real-World Example

Rachel finds a great fourplex for $320,000 but only has $20,000. Her uncle has capital but no time. They partner: he provides $64,000 (full down payment), she manages the property. They split cash flow 50/50 and equity appreciation 60/40 (favoring the uncle for his larger capital contribution). Both win.

Option 9: 401(k) Loan

Borrow from your retirement account to fund a down payment.

How It Works

Many employer 401(k) plans allow you to borrow up to 50% of your vested balance (max $50,000). You repay yourself with interest.

Typical Terms

• Borrowing limit: Lesser of $50,000 or 50% of vested balance
• Interest rate: Typically prime + 1-2%
• Repayment term: 5 years (sometimes longer for home purchases)
• Repayment: Through payroll deductions

Pros

• No credit check or approval process
• Interest goes back to your own account
• Fast access to funds
• No tax penalty if repaid on time

Cons

• Must repay even if investment doesn't work out
• Opportunity cost (money not invested in retirement)
• If you leave your job, full balance often due within 60 days
• Default triggers taxes + 10% penalty
• Reduces retirement savings

Best For

Investors with strong 401(k) balances and confidence in repayment ability; short-term capital needs before refinancing; emergencies only.

Real-World Example

Kevin has $120,000 in his 401(k). He borrows $50,000 for a down payment on a rental property. He repays himself $925/month for 5 years through payroll deduction. The rental property cash flows enough to cover this and more, effectively allowing him to invest in real estate while repaying himself with interest.

Option 10: Subject-To Financing

Purchase property "subject to" the existing mortgage, taking over payments without formally assuming the loan.

How It Works

The seller's mortgage stays in place; you take title and make payments on their behalf. The loan remains in the seller's name.

Key Points

• Due-on-sale clause: Most mortgages have this, giving lenders the right to demand full payment when the property transfers
• Risk: Lender could call the loan due (rarely happens if payments are current)
• Seller risk: Loan stays on seller's credit
• Legal complexity: Requires experienced attorney

Pros

• Little to no down payment required
• Assume seller's existing interest rate (valuable in high-rate environments)
• No credit qualification
• Fast closing

Cons

• Due-on-sale clause risk
• Seller's credit affected if you miss payments
• Ethically questionable in some scenarios
• May violate mortgage terms
• Requires willing and trusting seller

Best For

Sophisticated investors in specific situations (seller facing foreclosure, relocating quickly); not recommended for first-timers.

Real-World Example

A homeowner is relocating and can't sell quickly. They owe $180,000 at 4.5% interest on a home worth $220,000. You take title and agree to make their $912/month payment. You rent it for $1,600/month, cash flowing from day one while they're relieved of the burden. Risk: the lender could call the loan due, though this rarely happens if payments continue.

Comparing Your Options: Quick Reference

How to Choose the Right Financing for Your Situation

First-time investor, limited savings (<$15,000): → FHA house hacking or partner equity

First-time investor, solid savings ($30,000+), W-2 income: → Conventional investment loan (20% down)

Self-employed, good savings: → Portfolio loan or larger down payment conventional

Existing homeowner with equity: → HELOC or cash-out refinance

Experienced investor, fix-and-flip: → [Hard money loan](/blog/hard-money-loan-guide)

Poor credit or irregular income: → Seller financing, partner equity, or portfolio loan

Frequently Asked Questions

Q: Can I use a VA loan for an investment property? A: Not directly, but you can buy a 2-4 unit property with a VA loan (0% down) as long as you occupy one unit as your primary residence. Similar to FHA house hacking but with no down payment requirement.

Q: What credit score do I need for an investment property loan? A: Minimum 620 for conventional loans, but 740+ will get you the best rates and terms. Every 20-point increase can save you 0.125-0.25% in interest rate.

Q: Can I use rental income to qualify for my first investment property? A: Yes, lenders will typically count 75% of projected or actual rental income toward your qualifying income. You'll need either an existing lease or the appraiser's market rent estimate.

Q: How many investment property loans can I have? A: Fannie Mae allows up to 10 financed properties. Some portfolio lenders have no limit. The challenge is qualifying—each additional property tightens your debt-to-income ratio.

Q: Should I pay cash or get a mortgage for my first investment property? A: Unless you have substantial liquid assets, financing is usually smarter. Leverage amplifies returns, preserves capital for emergencies and opportunities, and allows diversification across multiple properties.

Q: Can I refinance an investment property after purchase? A: Yes, typically after 6-12 months of seasoning (ownership period). This is the basis of the BRRRR strategy: buy with hard money or cash, renovate, rent, then refinance into a conventional loan to pull your capital back out.

Q: What's the minimum down payment for an investment property? A: 15% is the absolute minimum for conventional investment property loans, but 20% is standard. FHA house hacking requires only 3.5% if you live on-site for 12 months.

Q: Do I need reserves to get an investment property loan? A: Yes, most lenders require 6 months of PITI in cash reserves per investment property. If you own multiple properties, this requirement compounds.

Q: Are interest rates higher on investment properties? A: Yes, expect to pay 0.5-0.75% higher than primary residence rates for the same loan type and credit profile.

Q: Can I use gift funds for a down payment on an investment property? A: Most conventional lenders require at least 5% from your own funds, but the rest can be gifted. Requirements vary by lender and loan type.

Final Thoughts: Matching Strategy to Situation

The "best" financing option isn't universal—it depends on your specific situation, goals, and constraints. Most successful investors use multiple strategies throughout their careers:

• Start: FHA house hacking or conventional with 20% down
• Scale: HELOCs and cash-out refinances to access equity
• Accelerate: Portfolio loans and creative financing as you gain experience
• Advanced: Hard money for fix-and-flips, commercial loans for larger properties

Begin with the most accessible option that matches your current situation, execute successfully, and build from there. Your first deal is about learning and proving you can do it—perfect financing is less important than taking action.

The right financing strategy combined with a good property in a solid market is your pathway to building long-term wealth through [real estate investing](/blog/brrrr-strategy-guide).

Related Articles

• Investment Property Down Payment: Your Real Options in 2026
• Using a HELOC for an Investment Property Down Payment: Smart Strategy or Risky Move?
• Using a HELOC as a Down Payment for Rental Property