Financing is one of the most important parts of real estate investing. The loan you choose can affect your monthly cash flow, timeline, and overall return on investment. Whether you're flipping a property or building a long-term rental portfolio, understanding your options is essential.
Below is a breakdown of the most commonly used financing options for real estate investors, along with when and why to use each.
1. Conventional Loans
Conventional loans are issued by banks or lenders and follow guidelines set by Fannie Mae or Freddie Mac. They're typically used for buying single-family or small multifamily rental properties.
Best for: Investors with good credit, steady income, and a long-term buy-and-hold strategy.
Pros: Low interest rates, long terms (15–30 years), and low down payments (as little as 15% for investment properties).
Cons: Strict lending criteria, loan limits, and the number of conventional loans you can hold is capped.
2. DSCR Loans (Debt Service Coverage Ratio)
DSCR loans are designed for investors and are underwritten based on the property’s income rather than personal income.
Best for: Investors with strong rental properties who don’t want to use personal tax returns for approval.
Pros: Easier to qualify, flexible underwriting, and ideal for portfolio growth.
Cons: Higher interest rates than conventional loans and often require larger down payments (20–25%).
3. Hard Money Loans
Hard money loans are short-term loans based on the asset (the property) rather than the borrower’s financials. These are popular for flips or BRRRR strategies.
Best for: Short-term investors looking to purchase and rehab quickly, then refinance or sell.
Pros: Fast approval and funding, less paperwork, and higher tolerance for credit issues.
Cons: High interest rates (8%–15%), short repayment terms (6–18 months), and significant upfront fees.
4. Bridge Loans
Bridge loans provide temporary financing between buying a new property and selling another or before refinancing into a permanent loan.
Best for: Investors who need to act fast but plan to replace the loan soon.
Pros: Speed and flexibility — great for timing-sensitive purchases.
Cons: High interest rates, short terms, and the need for an exit strategy.
5. HELOCs and Home Equity Loans
Home Equity Lines of Credit (HELOCs) and Home Equity Loans let you borrow against equity in an existing property.
Best for: Investors looking to fund down payments or renovations using equity from their primary residence or rentals.
Pros: Flexible use of funds, interest-only payments (HELOC), and lower interest rates than hard money.
Cons: Risking your existing property as collateral and variable interest rates (for HELOCs).
6. Private Money
Private money comes from individuals — often family, friends, or other investors — willing to fund your deals in exchange for interest or equity.
Best for: Investors with strong personal networks and proven experience.
Pros: Flexible terms, relationship-based lending, and quick funding.
Cons: Limited scalability, and relationships can be strained if a deal goes sideways.
7. Seller Financing
Seller financing occurs when the property owner acts as the lender, allowing the buyer to make payments over time directly to them.
Best for: Deals where the seller owns the property free and clear and is open to flexible terms.
Pros: Custom terms, no traditional lender, and potential to purchase with low upfront costs.
Cons: Not always available and requires mutual trust between buyer and seller.
Choosing the Right Tool for the Job
Every real estate deal is different — and so is the financing. A short-term flip requires speed and flexibility, while a long-term rental demands cash flow and stability. Savvy investors often use different types of loans depending on their strategy, timeline, and goals.
Working with a knowledgeable lender and real estate agent who understands your objectives can make all the difference. At Real Estate Investment Link, we connect investors with local experts to help structure the right deal, every time.