Investment property loan rates for 2018 have an average interest rate of about four to five percent, which tends to be higher than personal property. This is because lenders assume that you’ll make money off your investment property. Your property value may also increase over time, or you’ll have a renter to pay your mortgage. Finally, investment properties are riskier than personal property. All of these factors point to higher rates.
However, the interest rate you actually secure on a loan is based on your qualifications as a borrower, the type of loan you pick, and the type of project or building you need to be financed. Comparing investment property loans is the best way to make an informed decision. Here is a review of over a dozen types of loans to help you get started with the process.
You would think that since you get tax benefits from owning an investment property that it wouldn’t be so expensive. But the truth is that investment property loan rates are often higher than owner-occupied properties. How much higher depends on your down payment, how good your credit is, and what type of property you’re investing in. For example, a person who has good credit and puts 20 percent down on a personal residence can expect to pay an APR of 3.875 percent from Fannie Mae based on their risk assessment pricing adjustment of 0.75 percent. Keep in mind that the surcharge adds 0.75 percent of the loan amount to the fees, not to the APR.
If the same person tried to borrow money to finance a rental home instead of an owner-occupied property, then they can expect another surcharge no matter how good their credit is. Freddie Mac and Fannie Mae take on another risk-based price adjustment depending on the mortgages loan to value. In this example, an investment property loan with 80 percent would come out to be a 3.375 percent charge. So this means that someone who has a credit score of 720 would pay an additional 4.125 percent in fees. Most borrowers choose to pay a higher interest rate as opposed to paying extra points. And this 4.125 percent in costs can be paid for by adding on an additional 0.5 or 0.75 percent to the APR.
According to this example, a well-qualified borrower who puts 20 percent down and has a 720 credit score can expect to pay 4.375 percent to 4.625 percent to finance the investment property. But remember that this is for a single-family house. If you purchase a multi-family dwelling unit, you can expect to pay another one percent in fees or 0.125 to 0.250 percent added to your rate.
Simply put, businesses are a much riskier investment than personal properties, and lenders are well aware of this. When the housing crisis began in the late 2000’s, mortgage lenders were in for a shock. Research shows that even good borrowers stopped paying their mortgages when their house suddenly became a bad investment. Research indicates that prime borrowers were responsible for 60 percent of foreclosures, and this is how the term strategic default originated. Lenders know that as soon as you think of a property as a business, you’ll become unattached from it and this means it’s risky for them.
After all, if so many homeowners are willing to stop paying on their homes when they dropped in value, then you can imagine what they would do to their investment properties. Lenders know that investment properties are prone to bad renters, squatters, or other sticky situations in which an investor is stuck paying a mortgage they can’t afford. This is why they are considered riskier than owner-occupied properties.
Many of the same types of private mortgages that you obtain when buying a private property are still available to you when purchasing an investment property, but they tend to be more expensive and harder to get. Keep in mind that you cannot buy an investment property using a home loan that’s backed by the government unless you buy a multi-family dwelling unit and live in one of them. If the home is already securing by an existing VA loan, then you might be eligible to take it over but only if the seller agrees.
In this case, it would not matter if you plan to use the house as a rental. On the other hand, a portfolio lender who does not sell loans to investors can make up their own financing terms on a loan. You might be able to finance more properties or put less down with these types of loans, but expect the rates and fees to be higher.
Commercial residential loans are available for people who want to borrow money against the property’s income or purchase a property that has more than four units, but these can be pricey and hard to set up. In this case, you would have to set up a single asset bankruptcy remote entity, which prevents property owners from using their rental income without paying the mortgage. When you confirm a loan, you can usually get it within as little as three percent of your primary home.
Expect this number to go up to at least 15 percent with a fixed loan on an investment property and up to 35 percent for a multi-family dwelling unit with three to four properties with an ARM loan. Keep in mind that lenders want to see better credit for an investment property loan than they do for a primary residence. As an example, you can get approved with a 620 credit score with Fannie Mae when you put down at least 25 percent for a primary house, but this number increases to 640 for a rental property.
Your investment property loan interest rates can vary from 4 to 30 percent depending on what type of loan you go with. Generally, you’ll find the highest loan to value prices and the most competitive interest rates with Small Business (SBA) loans or United States Department of Agriculture (USDA) loans. Applying for a traditional commercial real estate loan takes a lot of time and resources.
You’re more likely to qualify if you have good credit. If the property you are financing needs work or you have poor credit or business finances that are subpar, then you can expect to put more money down or pay a higher interest rate when obtaining an investment property loan. If you find yourself in this situation, you might want to consider a commercial mortgage company that specializes in lending to subprime borrowers. You might also want to look for a hard money loan.
Here is a breakdown of the different interest rates based on what type of loan it is:
- SBA 504 loan: average rates 4.38% to 4.9%, LTV ratio 80% to 90%, average loan size one million, maximum term 20 years
- SBA 7(a) loan: average rates 5.25% to 9.25%, LTV ratio 80% to 90%, average loan size $350,000, maximum term 25 years
- USDA Business & Industry Loan: average rates 5.25% to 9.25%, LTV ratio 75% to 80%, average loan size $200,000, maximum term 30 years
- Traditional Bank Loan: average rates 4.20% to 8.00%, LTV ratio 70% to 80%, average loan size one million, maximum term 30 years
- Online Loan: average rate 7.00% to 30.00%, LTV ratio 70% to 90%, average loan size $50,000, maximum term five years
- Construction Loan: average rates 5.50% to 6.50%, LTV ratio 60% to 80%, average loan size one million, maximum term two years
- Conduit (CMBS) Loan: average rates 4.30% to 5.00%, LTV ratio 70% to 75%, average loan size two million, maximum term ten years
- Insurance Loan (includes life insurance): average rates 4.40% to 4.60%, LTV ratio 60% to 75%, average loan size five million, maximum term 30 years
- FHA Hospital or Senior Care Loan: average rate 3.80% to 4.70%, LTV ratio 75% to 83%, average loan size three to five million, maximum term 30 years
- Fannie Mae Apartment Loan: average rates 3.01% to 5.06%, LTV ratio 70% to 80%, average loan size $750,000, maximum term 30 years
- Freddie Mac Apartment Loan: average rates 3.59% to 4.27%, LTV ratio 70% to 80%, average loan size one million, maximum term ten years
- Bridge Loan: average rates 9.00% to 13.00%, LTV ratio 80% to 90%, average loan size one million, maximum term one year
- Soft Money Loan: average rates 6.50% to 17.50%, LTV ratio 60% to 65%, average loan size $150,000, maximum term eight years
- Hard Money Loan: average rates 10.00% to 20.00%, LTV ratio 50% to 55%, average loan size $150,000, maximum term two years
Investment property interest rates can start as low as three percent, but the loan to value ratios will be lower than those of an owner-occupied real estate loan. This means that you’ll be required to put more money down. The average loan to value ratio for investment property loans ranges from 65% to 75%. So if you buy a building for one million dollars, you may only get a $700,000 loan from a lender. This means that you’ll have to put down $300,000 of your money upfront. On the other hand, you’ll pay a higher interest rate for building an investment property rather than purchasing one. The rates are currently between 5% to 12%, but the loan to value ratio is higher than standard investment property loans so you don’t have to put down as much money.
Generally, the best places to go for an investment property loan is a bank, commercial mortgage company or a credit union. Keep in mind that banks tightened the reins on their requirements after the crisis in 2009, so you must be a reliable borrower to quality. You’ll want to have an excellent personal credit score, a solid investment pitch, sufficient money to put down as a down payment, and a proven track record of managing investment properties. Keep in mind that you may have to shop around to find the best deal and negotiate your loan terms as best as you can. Consider using a local mortgage lender or bank over a national institution because they tend to have a greater investment in helping grow the community.
Here are the investment property loan interest rates by property type:
- Apartment Complex: average rates 3.0% to 8.5%, LTV ratio 70% to 75%, average term 20 years, average amortization period 26 years
- Office Building: average rates 3.2% to 8.5%, LTV ratio 70% to 75%, average term eight years, average amortization period 30 years
- Retail Building: average rates 3.0% to 9.9%, LTV ratio 65% to 75%, average term six years, average amortization period 25 years
- Restaurant: average rates 3.7% to 13.3%, LTV ratio 60% to 70%, average term seven years, average amortization period 22 years
- Industrial Building: average rates 3.0% to 8.5%, LTV ratio 65% to 75%, average term 11 years, average amortization period 25 years
- Motel or Hotel: average rates 3.4% to 13.8%, LTV ratio 65% to 75%, average term eight years, average amortization period 23 years
- Golf Course: average rates 3.4% to 14.2%, LTV ratio 65% to 75%, average term nine years, average amortization period 22 years
- Senior Housing/Healthcare: average rates 3.4% to 9.9%, LTV ratio 65% to 75%, average term 14 years, average amortization period 25 years
- Campground/RV/Motorhome: average rates 3.2% to 11.1%, LTV ratio 65% to 75%, average term nine years, average amortization period 26 years
- Self Storage: average rates 3.3% to 8.5%, LTV ratio 65% to 75%, average term six years, average amortization period 28 years
- Special Purpose Building: average rates 3.8% to 14.0%, LTV ratio 60% to 70%, average term eight years, average amortization period 23 years