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Mortgages on Investment Properties

investment property mortgages

Investment properties, also known as non-owner occupied properties, can be very profitable for everyday homeowners and real estate investors alike.

While there is no guarantee that you’ll be successful, extensive research and the right timing could result in a tidy profit.

That said, it’s important to know the demographics of a particular neighborhood, and whether the market is set to improve or decline in the near and long term.

It’s equally important to find a tenant to rent out your property to ensure you’ll achieve positive cash flow immediately and continuously.

Achieving Positive Cash Flow on an Investment Property

  • A good investment property is one where you can easily achieve positive cash flow
  • Effortlessly find a good tenant
  • And realize healthy home price appreciation
  • Year after year for the foreseeable future

While it’s not imperative, positive cash flow will allow you to invest in other properties by minimizing losses and out-of-pocket expenses, which will keep your DTI ratio low.

It’s also quite important if the property you buy isn’t expected to increase in value significantly.

Cash flow isn’t as important if the property is expected to surge in value, but finding a property on the cheap with the potential to appreciate should be the ultimate goal.

Discovering that “hot property” is often the impetus for real estate investment. Just take your time to investigate before diving in.

Certainly pay attention to local area rents to determine if buying makes more sense than renting.  If the price-to-rent ratio is considerably favorable, it could be a no-brainer.

And take special care when investing out of state, and especially out of the country.

If you plan on buying an investment property in Mexico or Spain, do your research and make sure you’ve got a good understanding of the laws of the land.

Ensure you’re working with a reputable broker or builder. Ask for references!

Obtaining Mortgage Financing on an Investment Property

Investment PropertyNumber of UnitsMax LTV
Rate and Term Refinance1-475%
Cash-Out Refinance175%
Cash-Out Refinance2-470%

The next hurdle is obtaining financing on an investment property. Even if you’re familiar with how mortgage financing works, it’s important to understand the restrictions tied to investment properties as they often differ from primary residences and second homes.

If you plan on buying an investment property, be prepared to put some money down, usually 20% or more.

The days of 100% financing on investment properties are a thing of the past because banks and lenders incurred heavy losses from massive defaults and mortgage fraud.

All that speculation during the previous boom led to widespread strategic default, with investors cutting their losses on properties they had very little if anything invested in.

Also note that FHA loans won’t be an option, nor will VA loans or USDA loans, since they are reserved for primary residences only. So loan types will be pretty limited as well.

What Is the Minimum Down Payment on an Investment Property?

  • 100% financing is a thing of the past
  • Expect to put down 15% or more in most cases
  • Though underwriting guidelines will vary by lender and loan type
  • And by property type (such as number of units)

We’ve come a long way since 2006. And because lenders were hit with major losses during the housing crisis, they’ve adjusted their risk appetites significantly, especially when it comes to non-owner occupied properties.

Today, you may need to put 30% or more down on an investment property depending on your credit profile, documentation type, the number of units, and the value of the property.

For example, Fannie Mae (see chart above) limits the loan-to-value ratio (LTV) to 85% for the purchase of a one-unit investment property.

That means you need at least a 15% down payment if you want to finance one. It drops to 75% LTV for a 2-4 unit non-owner occupied property. That increases your down payment to 25%!

But wait, it gets even more restrictive. If you want to take cash out on a 2-4 unit investment property, your max LTV drops to 70%.

Now 30% equity is required, which might not leave a ton of cash available for extraction.

As you can see, the more complicated the loan scenario, the less you can finance. There’s also the issue of investment property mortgage rates, which will generally surge higher as the LTV and number of units goes up.

It can be a bit of a one-two punch and make qualifying that much more difficult.

Another hitch is that gifts for down payment are not allowed on an investment property, for obvious reasons.

One way around this is to occupy the property first and then rent it out in the future.

In fact, that’s a great way to get started in real estate investment. You live in the house or condo for a period of time, and eventually rent it out and buy another property. Rinse and repeat.

That way you know the ins and outs of the property, along with local area rents, and any other quirks. Ideally, you’ll also live close by if anything goes wrong.

Also note that many exotic mortgage programs such as interest-only home loans limit financing on investment properties to 80% or less for the most part.

So be prepared to come in with more cash if you’re looking for an ultra-low start rate or some sort of negative amortization program.

Lender Restrictions on Non-Owner Occupied Homes

  • Mortgage lenders often limit you to 10 financed properties
  • If you’re a big time real estate investor you may need to pay for subsequent properties with cash
  • Or pay off existing mortgages to qualify
  • Be sure to compare lenders carefully as some are more lenient than others

Now comes the trickier stuff. Most lenders don’t like to lend to investors with over 10 investment properties.

And many lenders have a limit to how much they will finance, so if you’ve got two loans with a certain bank or investor, they may not be able to provide financing on a third property if you’re over their aggregate financing limit.

Additionally, if you plan on buying an investment property within a condominium complex, note that investor concentration usually cannot exceed 50 percent.

This means at least half of the units need to be owner-occupied. And if it’s a new development, usually at least 50 percent needs to be sold and closed before many lenders will provide financing.

Most lenders also limit the total percentage of a complex owned to 10 percent by a single entity, so if there are only 10 units, you can typically buy just one.

Of course, these rules vary from bank to lender, and often developers will provide special financing on site to new investors.

But these issues can and often do arise, preventing investors from obtaining favorable financing terms.

So do your financing homework and obtain pre-approvals before making an offer or jumping into a contract.

And be prepared to show up to the signing table with a hefty down payment or you’ll likely be out of luck.

Investment Property Mortgage Rates Are Higher

Lastly, an important note about mortgage rates. Many investors forgo mortgage financing entirely and simply purchase investment properties with cash.

But not everyone has deep enough pockets to do that. And not everyone wants to lock up their hard-earned cash either.

If you do plan to finance your non-owner occ property with a mortgage, expect sizable pricing adjustments for both occupancy type and multiple units, if applicable.

And often investment properties are duplexes, triplexes, or fourplexes, so it can get pretty expensive.

Simply put, prepare to get saddled with a higher mortgage rate simply because it’s an investment property. And because rentals are often multi-unit as well, your wallet might get hit twice.

How much higher are mortgage rates on investment properties?

  • Mortgage rates can vary considerably
  • Based on the type of property and the number of units
  • The type of transaction (refinance or purchase)
  • And your own borrower attributes like credit score and down payment

It’s difficult to say your rate will be “X percent higher” because there are so many different variables and a large number of issuing banks with different risk appetites, but you could easily pay a percentage point or two higher.

For example, 7% vs. 5% on a 30-year fixed mortgage, which is certainly significant, especially if we’re talking about an expensive rental property, such as a 4-unit property in pricey part of the country.

If your investment property is 3-4 units, as opposed to 1-2, expect another pricing adjustment.

Assuming it’s also a condo, or worse, a high-rise condo, watch your interest rate climb even higher.

For example, if you purchase a NOO 4-unit property, expect your closing costs and/or mortgage rate to be significantly higher compared to an owner-occupied single-family residence.

And if it’s a refinance (or cash out refinance) expect mortgage rates to be even higher, assuming mortgage financing is even a possibility to begin with.

Tip: You may be able to snag a discounted rate if you go with a 15-year fixed vs. a 30-year fixed. But obviously the monthly payments will be higher as a result.

Why are mortgage rates higher on investment properties?

  • More risk when you don’t live in the property
  • Investors will pay their own home’s mortgage first
  • Often multi-unit properties that come with more pricing adjustments
  • Often condos which also have pricing hits

While it might seem unfair to pay more to finance an investment property, banks and mortgage lenders see investors as riskier borrowers than homeowners.

After all, if you live in your home, there’s less of a chance you’ll walk away if things go south.

There’s probably a better chance you’d ditch your investments before your primary residence. It is, after all, providing much needed shelter.

And if you occupy it, there’s a better chance you’ll maintain it properly and keep it in good shape. Pride of ownership and all that.

Most investors are also homeowners, so if they had to choose, they’d probably pay their own home’s mortgage first…and not displace their entire family.

This isn’t just opinion either. A ton of speculators ditched their properties during the housing crisis in the early 2000s after home prices plummeted.

Most didn’t have any skin in the game, aka a down payment, so it was easy to just stop paying the mortgage, even if it’s destroyed their credit.

There’s a good chance these same investment property owners held onto their primary residences and weathered the storm.

Anyway, this interest rate disparity explains why many investors pay with cash or commit occupancy fraud to obtain lower mortgage rates.

A common tactic is telling the lender they plan to occupy the investment property as their primary residence to obtain more favorable financing and then quickly renting it out after the fact.

Aside from being wrong, it’s a risky game to play for some interest rate savings.

In summary, this is the price of uncertainty; investment properties inherently carry more risk than owner-occupied homes and are priced accordingly.

Yet another reason why most investors try to buy with cash instead.

Read more: Are mortgage rates higher for condos?

8 thoughts on “Mortgages on Investment Properties”

  1. Colin,

    Your explanation is very consistent with my own experience. Do you know of any lenders willing to do 25-30 year mortgages with a fixed rate (sub 5%) in today’s market when the borrower already has over 10 mortgages….?



  2. Mike,

    I think some of the newer non-QM lenders allow you to finance 10+ properties, but not sure if the rate will be below 5%.

  3. It’s definitely tricky to find financing for groups of condos. We own 22 condos in an older complex, and even though we’ve turned around the units since buying them in groups from tired investors, have renovated the units, have great tenants that all pay on time by ACH, and are making good money, the word “condo” seems to scare off bank and credit union loan officers. I’ve spoken with many loan officers and learned their institutions aren’t touching investment condos. Put those same units into an apartment building and financing is available all day long.

  4. I own a property in NJ, my parents live in it. It has depreciated quite a bit. I owe about $370k. Its not my primary residence. Paying interest at almost 8%, tried to refinance but was rejected by current lender. What are my options?

  5. Dani,

    If you think you can refinance if it’s a primary residence as opposed to an investment property, maybe move in with your parents and make it primary to get the rate down?

  6. I am buying a 2 family non owner occ. property, need a good low cost, low interest lender. cleveland, ohio and i already have a non owner condo.

  7. Hello Colin:

    I am looking to refinance 5 short term rental houses in San Antonio. Do you know of any lenders who might be interested to refinance?

  8. Ricardo,

    Don’t have a particular lender suggestion, but maybe a blanket refinance would work to refi all of them in one shot.

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