A Beginner’s Guide to Investment Property Loans

investment property loans

Want to claim a slice of Iowa’s real estate market pie? Grab a fork, and let’s dig in (to the nitty-gritty of investment property loans).

Investment properties are especially ripe for opportunity in fast-growing cities, where there’s lots of property being grabbed up as the areas expand and develop.

If you’re in Central Iowa, you might be scoping out Altoona investment properties for this exact reason—and you’d be looking in the right place. After all, Altoona development is expanding at an impressive rate.

However, it’s pretty unlikely that you have enough cash on-hand to purchase an investment property outright. This is why you’ll need to get familiar with the different types of investment property loans, so you can browse your financing options with confidence and optimize your investment opportunities.

If you’re new to the investment property business, there are a lot of different loan options to choose from, which can be intimidating.

Fear not—we’ll guide you through the different types of investment property loans and show you how they work, their pros and cons, and other must-know information about them.

We’ll walk you through options for buy-and-hold investments, fix-and-flip projects, as well as large-scale commercial real estate in Iowa!

Let’s go.

Conventional Mortgage Loans for Investment Properties

Conventional mortgage loans are common, straightforward ways to finance investment properties.

If you own a home, chances are you’re already familiar with how they work. Conventional loans (also known as “mortgage loans”) are bank loans that follow Fannie Mae and Freddie Mac guidelines, and they’re typically good choices for buy-and-hold investment properties.

These loans are pretty cut and dry. As the borrower, you’ll agree to pay back your money to the lender with a set interest level, after providing a down payment. Investment property down payments typically hover around 15% but can vary depending on the mortgage agreement with your lender.

If you choose to apply for a conventional mortgage loan for your investment property, keep in mind that your lender will want you to meet stringent qualifications, such as debt-to-income ratio, credit score, etc.

Screening and approval for these guidelines can take up to 45-60 days, making conventional bank loans a bit more time-consuming than some other options.

Overall, mortgage loans for investment properties are straightforward and widely utilized for long-term financing, but they can come with longer wait times and heftier paperwork than some alternative options.

Don’t worry—other investment property loans can be quicker and less complicated.

Hard Money Investment Property Loans

Hard money loans (also known as “fix and flip” loans) are private, short-term loans that are significantly quicker and more accessible than conventional bank loans.

When using hard money loans, you can expect to get your investment property funding within a few days or weeks, compared to 45-60 days when applying for mortgage loans.

Here’s how hard money loans work.

When you apply for a hard money loan, your ability to secure it is based on the potential income value of the investment property.

In other words, your credit score and personal finances aren’t what drive the lender’s decision to sign the deal, like with mortgage loans. The “hard” asset—the investment property itself—is what backs the arrangement.

However, it’s important to keep in mind that these loans can carry higher interest rates due to their short-term nature.

Hard money loans can cover up to 100% of the value of the property, plus construction and renovation costs. They’re meant for short-term use for projects like “flipping”, where the borrower secures the property, renovates it, sells it quickly, and uses the profit to pay off the loan in due time.

Yes, hard money loans for investment properties are meant for short-term use, but that doesn’t mean they’re not viable options for buy-and-hold investors to make their way into the market.

In fact, many buy-and-hold investors use these hard money loans initially to secure the property, before they take out a different type of loan that’s better suited for long-term use (like a mortgage loan).

Home Equity Loans for Investment Properties

When you’re looking to start a real estate investment purchase, another option to consider is using your home’s equity.

Home equity loans are secured based on (you guessed it) your home equity—how much is left on your mortgage vs. the current market value of your home.

For example, if you have $150,000 left on your mortgage and the current market value of your home is $500,000, you’d have $350,000 in equity. Then, using a home equity loan, you’d be able to borrow from that $350,000 as agreed upon with your lender. Typically, lenders will loan you up to 80% of the amount of your home equity.

The pros and cons of using home equity loans for investment property purchases are relatively similar to those of mortgage loans. They’re good options for buy-and-hold investments, especially for real estate investors who have the personal financial standing to pass stringent qualifications.

However, home equity loans can come with higher interest rates, as they’re viewed as a “second mortgage” by the issuing bank. Plus, they carry similar wait times to conventional mortgage loans.

Commercial Investment Property Loans

There are a few different loan options for business or commercial real estate investors. Typically, these loans deal with greater amounts of money and much larger properties.

Small Business Association (SBA) Loans for Investment Properties

Smaller businesses may want to look into loans provided by the U.S. Small Business Administration. Their 7(a) and 504 loans can be utilized to purchase and/or repair business real estate, but it should be noted that their Microloans cannot.

The SBA 7(a) loan covers up to $5 million in financing, while the SBA 504 covers up to $14 million. The greatest advantages of these SBA loans are their relatively low interest rates, along with their secure government backing.

However, they may have slow approval processes due to qualifying criteria screenings.

Commercial Bridge Loans for Business Investment Properties

Commercial bridge loans are essentially “fix and flip” loans for larger commercial properties. They operate in a similar fashion to the hard money loans mentioned earlier, but on a different scale.

They’re titled “bridge loans” because they “bridge” the gap between a quick, initial investment property purchase and stable, long-term financing.

Just like with hard money loans for smaller investment properties, commercial bridge loans are typically secured with collateral—the property itself. They’re great options for commercial real estate investors to “get their foot” in the door, before taking out a conventional bank loan or pursuing another buy-and-hold financing program.

Finding Commercial Real Estate in Iowa

Looking for investment properties or commercial real estate for sale in Iowa? One of the leaders in Iowa economic development is Altoona, a community just minutes east of downtown Des Moines. Altoona offers a high quality of life, a business-friendly environment, and an exciting dining and retail scene. Over the last two decades, Altoona has experienced significant growth, and there are currently numerous opportunities for investors looking to purchase properties or developers looking to build.

You can search our commercial property database here or request additional information.