Planning on buying an investment property? You may be looking into taking out an investment property loan. This is a loan that is used solely to purchase real estate intended to generate income as an investment. It cannot be used when buying a primary residence.
“These loans often focus more on a borrower’s broader financial profile, their cash reserve liquidity, down payment strength and future property performance compared to an owner-occupied mortgage,” said Bob McKay, president, CCUE, at Together Credit Union. “The reason is mainly that the lender needs to assess both the applicant and the potential of the investment in question.”
How an Investment Property Loan Can Generate Wealth
An investment property loan can make great financial sense in a way that a home mortgage loan can’t, because it can operate as a wealth-building tool under the right circumstances.
“An investment property loan makes sense when the property’s rental income covers the mortgage payment, taxes, insurance and basic maintenance, and still produces a positive return,” Zach Cohen, managing partner at Ridge Street Capital. “Investors who lock in a fixed-rate loan in a rising rent environment benefit from stable debt costs while their income grows over time. The spread between the cost of the loan and the return the property generates is where long-term wealth builds.”
There are several types of investment property loans out there, and the key to building wealth here partly depends on the type of investment property loan you take out. MoneyLion spoke with experts to learn about the best investment property loans to help you make money when buying real estate.
1. Debt Service Coverage Ratio (DSCR) Loan
A DSCR loan, according to Jason Jepson, co-founder at IncomeEngine, is the “most scalable and practical solution for acquiring and growing rental property portfolios.”
But before you run to take out a DSCR loan, make sure you check off the following list provided by Jepson. If you fail to meet any of this criteria, this probably isn’t the ideal loan for you:
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Your investment property generates strong rental income
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You want to scale beyond one or two investment properties
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Your income doesn’t fully reflect your financial strength
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You want to move quickly without heavy documentation
DSCR loans enable wealth building by enabling scalability. In other words, they help open the door to buying additional investment properties.
“By focusing on the income the property produces, investors can continue acquiring assets without being limited by personal income or traditional underwriting rules,” Jepson said.
