The Investor's Guide To Real Estate Loans: Summarizing Your Options

Diving into the real estate market might seem like a venture reserved for those with hefty bank accounts, but that's far from the truth. Believe it or not, you don't need a vast fortune or a significant savings account to make your mark in this lucrative field. Here's the insider secret: real estate loans are the game-changer that can turn you into a real estate investor without the need to amass a small fortune first.

This comprehensive guide will uncover the strategic power of leveraging loans for real estate investments and detail the array of options at your disposal. So, if you've ever thought that investing in real estate was beyond your reach, it's time to rethink and explore how loans can open doors to financial and career growth in one of the most promising sectors.

• What Is A Real Estate Loan?
• The Strategic Advantage Of Using Real Estate Loans
• 12 Types Of Real Estate Loans For Savvy Investors
• The Differences Between Commercial & Residential Loans
• Final Thoughts On Real Estate Loans

*Before we begin our guide on real estate loans, we invite you to view our video on How To Get Into Real Estate With No Money! Host and CEO of Real Estate Skills, Alex Martinez, provides the perfect guide for beginners to invest in real estate using no capital of their own!

What Is A Real Estate Loan?

A real estate loan is a specialized form of financing designed to facilitate the purchase of real estate properties, including land. These loans enable individuals and businesses to acquire real estate ventures that might otherwise be out of their monetary reach.

But they aren’t all the same. They have varying interest rates, pre-approval requirements, and terms. Different loans serve different purposes in the real estate industry. However, they generally fall into two primary categories: residential and commercial real estate loans for investors. Knowing the distinctions between these types of loans is the key to selecting one that best fits your investing needs and goals.

The Strategic Advantage Of Using Real Estate Loans

While you can always inject personal funds into real estate and skip debt, using investment real estate loans offers the following unique benefits:

• Increased ROI: Technically, taking out a real estate loan puts you into debt, but if well-calculated, it’s good debt. It allows you to afford real estate investments you wouldn’t otherwise afford, amplifying your gains.
• Remain Liquid: Using business real estate loans to finance investments allows you to preserve your capital, keeping you liquid and allowing you to capitalize on new opportunities when they arise.
• Reduce Risk: Financing your real estate investments with a loan eliminates the risk of losing all your capital in a single investment.
• Scale Investment Operations: By leveraging real estate loans for investors and their refinancing options, you can spread your investment across more properties, increasing returns and expanding your portfolio.

12 Types Of Real Estate Loans For Savvy Investors

Here are the different types of commercial real estate loans you can capitalize on to finance your investment goals in 2024:

• Conventional Mortgages
• Hard Money Loans
• Private Money Loans
• Commercial Loans
• Portfolio Loans
• FHA Loans
• Bridge Loans
• VA Loans
• Home Equity Lines Of Credit
• Self-Directed Retirement Accounts
• 203(k) Loans
• Conforming Loans

1. Conventional Mortgage

A conventional mortgage is the most common type for first-time homebuyers in real estate.

It’s “conventional” because the Federal Housing Administration or any government-related agency does not back it. Instead, it comes from private lenders like banks, credit unions, and mortgage companies.

To be clear, a conventional mortgage can be either conforming or non-conforming. Both types are invaluable funding sources for investors strapped for capital since the down payment can be as low as 5%. Moreover, they spare borrowers the program-specific fees associated with government-backed mortgages.

However, conventional mortgage lenders typically approve these loans based on the fair market value of the investment property. So, if you’re looking to buy a distressed property for wholesaling or house flipping, it may not be ideal since you may not have adequate financing to cover the cost of rehabbing. Also, conventional mortgages take too long for investors to move at the pace they need to. So, while conventional mortgages are an excellent tool for traditional homebuyers, they are less than optimal for investors.

2. Hard Money Loans

Need better credit but need money to invest in real estate? Consider a hard money loan.

Unlike regular loans, hard money loans don’t rely on your credit score or income. Instead, they’re secured by the assessed value of an asset, typically a property. So, a hard money loan could be ideal if you’ve found a promising investment property but are short on funds to buy it.

Additionally, the pre-approval process is swift. Some lenders even prequalify borrowers online within 24 hours and approve the loan in 3-5 days, making it one of the most convenient private real estate loans for investors.

These loans are usually short-term, with payment options of six months to three years. Simply put, they’re an excellent form of real estate financing.

However, due to the risk for lenders, hard money loans coincide with high interest rates—often as high as twelve to fifteen percent.

Read Also: 9 Best Hard Money Lenders For Beginners & First-Time Investors

3. Private Money Loans

If you’ve got the gift of gab and need a form of financing where your creditworthiness isn’t a big deal, a private money loan is probably your best mortgage option.

As the name implies, these loans come from individual investors, organizations, or sometimes, even friends and family, giving you more lender flexibility. They’re not as strict as traditional loans, so the borrower’s credit isn’t usually a big concern.

What’s great is that you can negotiate the interest rate and loan term to suit your needs better. Plus, you can get as much as you need to cover the cost of investing, and approval is usually quick compared to traditional loans.

However, approval typically depends on your relationship with the private investor. You must build a good rapport with them and convince them your investment plan is solid. After all, their returns are tied to your success.

If you’re not affiliated, borrowing from a private investor can result in a high interest rate.

4. Commercial Loans

A commercial loan is a form of credit typically issued by small community banks, credit unions, online lenders, non-profit lenders, and sometimes, the U.S Small Business Administration (SBA).

These loans help finance commercial projects, such as purchasing and rehabbing office buildings or apartment complexes. Businesses also use them to finance highly specialized equipment purchases.

They’re also quite varied, with options ranging from SBA 7(a) loans and hard money commercial loans to conduit and commercial bridge loans. Consequently, the terms also vary widely.

Take SBA 7(a)loans, for example. They’ve got interest rates ranging between 5-8.75%, repayment terms stretching up to 25 years, and can go up to $5 million. In contrast, a hard money commercial loan’s interest rate begins at 8%, maxes out at three years, and demands a 90% loan-to-value ratio.

While the terms vary, you generally need a credit score of at least 600 to qualify for commercial loans. Lenders appreciate borrowers with a net worth equal to their borrowing. They prioritize strong portfolios, meaning you must provide cash flow statements.

So, are commercial loans among the best mortgage choices for real estate investing? Absolutely! But they’re ideal for seasoned real estate investors.

5. Portfolio Loans

As noted, most loans by traditional lenders, like banks, are typically sold to entities like Fannie Mae. However, they maintain specific loan categories, such as portfolio loans, in their investment holdings.

Thanks to this unique distinction, you’ll usually get a portfolio loan from smaller institutions such as local banks and credit unions. Additionally, the lender calls the shots. As a result, portfolio loans usually feature lenient underwriting standards, lower credit score requirements, fast approval, and extended repayment terms.

And here’s the best part: the lender can customize interest terms to fit your needs. For instance, borrowers often get to choose between adjustable-rate mortgages and interest-only terms. Additionally, portfolio lenders are usually willing to finance investment properties traditional lenders wouldn’t, including distressed homes and mixed-use developments.

What is the trade-off? Because portfolio lenders take on more risk by holding the loan, they usually impose high interest rates. They also ask for bigger down payments and extra fees might be involved. So, while they’re one of the best commercial real estate loans for investors, weigh the cost and benefits before you commit to one.

For in-depth training on real estate investing, Real Estate Skills offers extensive courses to get you ready to make your first investment! Attend our FREE training and gain insider knowledge, expert strategies, and essential skills to make the most of every real estate opportunity that comes your way!

6. FHA Loans

Say your credit score is below 600, but you’re eager to invest in real estate. An FHA loan could be your ticket to building a real estate portfolio.

As its full title suggests, a Federal Housing Administration loan is backed by the federal government. The U.S. Department of Housing and Urban Development oversees these loans, while third-party lenders, primarily big banks, issue them. Knowing this will help you identify the lenders you can turn to for FHA loans.

That said, FHA loans have pretty relaxed credit score requirements. You can secure one with a FICO score as low as 580. Plus, you’re eligible for one even with a down payment as little as 3.5% of the home price.

However, there’s a catch: FHA loans are primarily meant for owner-occupants. If you want to invest, it’s a prerequisite that you invest in a multifamily property and live in at least one of the units; this makes FHA loans more suited to buy and hold for rental property investors.

7. Bridge Loans

Have you stumbled upon a promising wholesale property while driving for dollars but waiting on the sale of your current wholesale property to finance it? You don’t have to wait. A bridge loan could be your solution.

A bridge loan is a short-term real estate loan designed to cover the down payment for a new home while the current one awaits selling.

Also known as a swing, interim, or gap financing loan, it fills the financial gap between when funds are needed but not immediately available. For example, when you need money from a current property to buy another one but have yet to sell it.

These loans empower investors to capitalize on lucrative fly-by-night opportunities and adapt to market shifts. Moreover, they offer a grace period before the first payment is due, giving you time to find a homebuyer for that first property and quickly repay the loan.

Repayment periods range from a few weeks to monthly payments depending on the lender’s terms or your specific circumstances. Some lenders will even create a custom monthly mortgage payment schedule based on the life of the loan.

Nonetheless, bridge loans expose lenders to higher risks and, as such, come with higher interest rates—usually about 2% higher than traditional rates.

You should also anticipate additional loan closing costs, such as appraisal, escrow, origination, and admin fees. Despite these expenses, a bridge loan is among the best mortgage options for investors.

8. V.A. Loans

You may be eligible for a V.A. Loan if you’ve served in the qualified U.S. Armed Forces. The Department of Veteran Affairs offers these loans to help service members and their qualifying spouses achieve homeownership.

Due to their purpose, V.A. loans offer quite favorable terms, including no down payment, and private mortgage insurance isn’t needed either. Since the Department of Veteran Affairs sets no specific credit score requirements, most V.A. loan lenders offer flexible FICO requirements—some accept a score as low as 500.

V.A. loans are assumable; you can sell the property along with the loan as long as your lender approves. This feature, along with lower-than-average rates, makes real estate investing through a V.A. loan quite a profitable venture.

However, VA loans are primarily intended for primary residences, just like most government-related loan products. Therefore, you have to occupy the unit for most of the year. To navigate this requirement, consider investing in a multi-unit, such as a duplex, triplex, or quadplex, where you can live in one unit and rent out to others. This strategy allows you to maximize the incredible perks of a V.A. loan while still meeting eligibility requirements.

Once you pay off your V.A. home loan, you can sell the property and cash in the profits.

9. Home Equity Lines Of Credit

Homeowners who aspire to venture into real estate but lack the capital can access funding by tapping into their property’s equity.

A home equity line of credit (HELOC) lets them borrow funds with their property as collateral. It works similarly to a credit card, meaning they can borrow and repay as many times as they need within the set limit.

Furthermore, since the property already serves as collateral, the homeowner’s credit score isn’t the primary factor for approval; this makes a home equity loan a pretty good source of payment for real estate investing, as it means you’ll always have a source of cash flow as long as you meet repayment obligations.

The main drawback is that you risk your property going into foreclosure if you miss payments. Responsible borrowing and repayment are essential if you intend to utilize this option for your real estate investing needs.

10. Self-Directed Retirement Accounts

So, you’re short on real estate capital but have a ROTH or self-directed retirement account? If yes, you’ll be glad to know you don’t have to wait until you’re grey to enjoy the money in your IRA. You can tap into it to grow your real estate.

However, as with anything affiliated with the IRS, there are strict rules to follow (more on this shortly).

When real estate investors choose to use a Self-Directed IRA (SDIRA) for real estate investments, they must adhere to specific IRS rules to maintain the tax-advantaged status of their account. Investments cannot be used for personal gain before retirement; this means no living in or directly benefiting from the properties purchased. All expenses related to the property must be paid from the SDIRA, and all income generated must return to it. Additionally, investments must avoid transactions with disqualified persons, such as family members, to prevent self-dealing. These regulations ensure that the IRA remains compliant and its benefits are intact.

Also, remember that real estate investments carry risks like property depreciation, unexpected expenses, and vacancies. Do due diligence before withdrawing from your IRA to invest in real estate, as you may end up with penalties for overcontributing.

11. 203(k) Loans

Have you found a distressed property with immense profitability potential but plan to live in it before resale? Consider a 203(k) loan; it can help you cover renovation costs.

A 203(k) loan is a government-backed loan primarily aimed at homebuyers in the low-to-moderate income brackets.

Notably, there are two types: a limited and a standard 203(k).

A limited one allows borrowers up to $35,000 for cosmetic property repairs, while the standard one allows funds to finance the purchase price and rehabilitation costs, including materials and labor.

Borrowers can borrow up to 110% of the after-repair value, making it an excellent loan option when funds are scarce to purchase or finance property renovation.

Moreover, you have flexibility with interest rates. You can choose between a fixed-rate mortgage and an adjustable-rate mortgage. Even more appealing is that you only need to commit to a 3.5% down payment, making the loan accessible.

The main downside with a 203(k) is that it’s intended for owner-occupants. So, if you solely want to purchase a property for investment, you won’t qualify. But if you'll live in it for a while, consider a standard 203(k).

Other notable disadvantages are that you’ll need to pay for mortgage insurance, and since it’s a federal loan, a 203(k) may take up to six months to close, making it inconvenient if you need quick financing for an investment.

12. Conforming Loans

As noted, conforming loans are conventional loans that adhere to the terms and conditions set by Fannie Mae and Freddie Mac Agencies.

Here’s a little behind-the-scenes explanation to help you understand why: After approving your loan, the lender sells it to Fannie Mae and Freddie Mac Agencies, which then lend the money to the next borrower. The agencies then sell the money to investors as securities.

Does this affect your loan? No, it lowers your interest rates. Your job as the borrower is to borrow within set limits and pay mortgage insurance if your down payment is less than 20%.

Conforming loans are a great form of financing as long as your capital needs are within or below the borrowing limits.

The conforming loan limit in 2024 is $766,550. So, if you need a real estate loan bigger than that, you’ll need to explore other options this year.

Read Also: Real Estate Financing: The 6 Best Funding Options For Investors

The Differences Between Commercial & Residential Loans

Although commercial and residential real estate loans typically power the purchase of real estate investments, they differ in terms of:

• Purpose: Commercial real estate loans are for businesses. They finance the purchase, refinance, or development of properties, land, or any other real estate asset used for business purposes or investment, such as office buildings, retail spaces, and apartment complexes with five or more units. On the other hand, residential loans are for purchasing or refinancing properties or real estate intended for personal use, such as single-family homes.
• Loan Amounts: Commercial loans are usually larger. Borrowers must also provide a larger down payment or a significant asset as collateral. Loan amounts for residential loans are typically lower.
• Terms: Commercial loans have shorter repayment terms, usually 5 to 20 years, depending on the required payment amount. Interest rate terms range from fixed-rate mortgages to variable and interest-only, while the loan-to-value ratio ranges from 60% to 80%. With residential loans, applicants get longer terms, commonly 15-30 years, and the interest terms are usually either fixed or adjustable. Depending on the program and qualifications, they also get a higher LTV, usually 80-95% of the property’s value.
• Approval Criteria: Residential loan lenders primarily depend on the borrower’s credit score, income, debt-to-income ratio, and property value to approve a loan. Commercial lenders often rely more on the real estate’s income-generating potential and the applicant’s business plan.

Final Thoughts On Real Estate Loans

Even with enough personal funds, utilizing small commercial real estate loans for your REI ventures offers significant advantages. For instance, loans amplify your buying power, allowing you to expand your portfolio seamlessly. And with your funds freed up, you can leverage new investing opportunities.

However, as per our list above, real estate loans vary widely. From conventional and hard money loans to bridge and V.A. loans, understanding your options and utilizing a mortgage calculator is the key to selecting one that best fits your needs.

Thankfully, our guide defines real estate loans, the various types, and how they apply to investing to help you make informed decisions.

Sign up for our free wholesaling and house-flipping course today for even more impactful investing insights and strategies.