The Different Types of Loans for Real Estate Investors
Jul 15
4 min read
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Financing is one of the most important parts of any real estate investing strategy. Whether you’re buying your first rental property or scaling your portfolio with larger deals, understanding the different types of loans available will help you make smarter decisions and close deals faster.
Conventional Loans
What it is: Traditional mortgages offered by banks and credit unions, often conforming to Fannie Mae and Freddie Mac guidelines.
Best for: Long-term buy and hold investors with W-2 income looking for low rates and fixed payments.
Interest Rate: 6-8% (investment properties usually ~0.5-1% higher than primary residences)
Down Payment: 20-25% minimum for single-family; 25%+ for small multi-family
Pros:
✅ Low interest rates
✅ Long-term fixed payments for stability
✅ Widely available
Cons:
❌ Strict income and credit requirements
❌ Limited number of conventional loans allowed under personal name
❌ Slower underwriting process compared to hard or private money
Portfolio Loans
What it is: Loans kept on the lender’s books rather than sold to Fannie or Freddie, allowing for more flexible underwriting.
Best for: Investors growing a portfolio quickly who need flexibility that conventional loans don’t offer.
Interest Rate: 6.5-9% (varies by lender and deal risk)
Down Payment: 20-30%
Pros:
✅ More flexible underwriting criteria
✅ Can finance multiple properties under one lender
✅ Useful when you exceed conventional loan limits
Cons:
❌ Higher rates than conventional loans
❌ Often adjustable rate terms
❌ Fewer lenders offer portfolio products
Commercial Loans
What it is: Used for properties with five or more units or commercial real estate like office, retail, and industrial. Based primarily on the property’s income.
Best for: Apartment buildings, mixed-use, or commercial property acquisitions.
Interest Rate: 6.5-9% (depending on property type, borrower strength, and market rates)
Down Payment: 20-30% typical; can be higher for special-use or riskier assets
Pros:
✅ Qualifies based on property income, not personal income alone
✅ Enables large-scale multifamily or commercial acquisitions
✅ Builds business credit profile
Cons:
❌ Shorter loan terms (5-10 years) with balloon payments
❌ More complex underwriting process
❌ Requires strong property cash flow to meet DSCR
Hard Money Loans
What it is: Asset-based lending focusing on property value and exit strategy rather than borrower credit.
Best for: Fix and flip projects or when you need fast closing for competitive offers.
Interest Rate: 8-15%+ (plus points/fees of 1-4% upfront)
Down Payment: Often 10-20% of purchase price; some lenders fund up to 90% purchase and 100% rehab if ARV supports it
Pros:
✅ Fast funding (days instead of weeks)
✅ Flexible credit requirements
✅ Funds distressed properties banks won’t touch
Cons:
❌ High interest rates and fees
❌ Short terms (6-24 months)
❌ Risk of foreclosure if flip or refi strategy fails
Private Money Loans
What it is: Loans from individual investors rather than institutions, with terms highly dependent on your relationship and their risk tolerance.
Best for: Flips, BRRRRs, or building long-term partnerships for scaling.
Interest Rate: 6-12% (negotiable)
Down Payment: Negotiable; can range from 0-20% or structured as 100% funding with profit splits
Pros:
✅ Highly flexible terms
✅ Can fund deals banks reject
✅ Builds powerful investor relationships
Cons:
❌ Requires building trust with private lenders
❌ Terms can be costly without proper negotiation
❌ Not as structured as institutional loans
Home Equity Line of Credit (HELOC)
What it is: Uses equity from your primary residence or another property to fund investments via a revolving credit line.
Best for: Down payments or renovations to maximize returns without selling existing assets.
Interest Rate: ~7-9% variable (Prime + margin)
Down Payment: N/A; based on equity available with CLTV limits of ~80-90%
Pros:
✅ Reusable revolving credit line
✅ Lower rates than hard money or private loans
✅ Interest-only payments during draw period
Cons:
❌ Variable rates can rise unexpectedly
❌ Ties up equity in your home, increasing risk
❌ Requires strong credit and property equity
DSCR Loans
What it is: Debt Service Coverage Ratio loans qualify based on the rental property’s income rather than your personal income.
Best for: Buy and hold investors scaling portfolios without traditional income verification.
Interest Rate: 7-9% (slightly higher than conventional due to minimal income documentation)
Down Payment: 20-25%; some lenders require 30% for small multi-family or short-term rentals
Pros:
✅ No personal income verification needed
✅ Good for self-employed investors or multiple properties
✅ Easier qualification based on rent covering debt payments
Cons:
❌ Slightly higher interest rates
❌ Requires property to cash flow well to qualify
❌ Limited lenders offer DSCR products
Seller Financing
What it is: The seller acts as the lender, allowing you to pay them directly over time with flexible, negotiable terms.
Best for: Creative deals, distressed sellers, or properties that are hard to finance conventionally.
Interest Rate: 4-10% (fully negotiable depending on seller’s needs and terms offered)
Down Payment: Highly negotiable; 0-10% possible, though 10-20% is common
Pros:
✅ Flexible terms with no bank underwriting
✅ Possible low or no down payment
✅ Great for properties that don’t qualify for traditional loans
Cons:
❌ Depends on seller willingness
❌ May include balloon payments
❌ Usually shorter terms requiring future refi or payoff