2023 Guide to Financing Options That Help Your Rental Home Cashflow

Not all debt is bad. The right debt has the potential to increase your wealth long-term — like a mortgage or using the equity in your home as a down payment on a rental investment home. The right finance can also help you maximize your cash flow and appreciation of the home by funding renovations and sought-after amenities. 

But before you start shopping for loans, it’s a good idea to get up to speed on your options. 

For instance, did you know that most banks don’t offer conventional bank mortgages for second or investment homes but instead offer a specific investment property loan? Or that you can’t access government-insured loans to buy a rental property unless you are an owner-occupier within the duplex/multifamily complex? The use of the home plays a role in applying for finance, so consider speaking to a broker about your intentions and options. 

The main goal is to ensure your rental home can achieve positive cash flow. This means keeping repayments, interest rates, and ongoing costs below what you can earn in rental income. It could also mean borrowing money to fund improvements that will yield more rental income and make the home more profitable in the long-term.

This article covers the following FAQs on rental home financing:

• Can I get a conventional loan to finance a rental property?
• What is a jumbo loan and do I need one for a rental home?
• Can I finance a rental property with an FHA loan or special program loan?
• Are Hard Money or Bridge Loans a good idea to finance an investment home?
• Can I use the equity in my home to finance a down payment for an investment property?

Can I get a conventional loan to finance a rental property?

Mortgage loans fall into three main categories; Conventional loans, FHA loans and special programs. Conventional loans simply describe any type of loan that isn’t government-insured, like a standard mortgage from a bank or credit union lender. 

Some lenders may provide a conventional home loan for a rental home or investment property, but most won’t take rental income into consideration for a standard mortgage loan. Instead, they will ask existing homeowners to apply for a specific ‘investment property loan’ to finance a second home they won’t live in. This will have different requirements, such as a stronger credit score and down payment. 

Requirements for an investment property loan include:

• A down payment of 15% - 25% or more
• Credit score of 720 or more
• Debt-to-income ratio between 36% - 45%

What is a jumbo loan and do I need one for a rental home?

In some counties, the cost of housing exceeds the limits of the Federal Housing Finance Agency (FHFA) limits. In 2023, the limit for bank loans on single-unit properties is $726,200 for most areas and up to $1,089,300 for high-cost areas like San Francisco County. 

Jumbo loans allow you to borrow a higher amount to finance in a pricier area or to buy a larger home. They will have different lending requirements and may need you to have a higher income, credit score and down payment. 

Can I finance a rental property with an FHA loan or special program loan?

FHA and government-backed loan programs are only available to owner-occupied properties. If you’re looking to access one of these loans to finance a rental home, you will also need to live on site. That means if you purchase a duplex or multifamily complex with a view to live in one of the housing units, you could qualify for an owner-occupier loan while also earning rental income. 

Are Hard Money or Bridge Loans a good idea to finance an investment home?

Hard Money (or ‘Bridge Loans’) offer more flexible terms and can be approved more quickly than conventional mortgages. Because of this flexibility, they are preferred as short-term finance options for real estate investors, for example when investing in a home to renovate quickly and ‘flip’ for profit. 

Private lenders have lower credit score thresholds and determine the property’s potential value to decide if they will loan the money. The downside is that they have higher interest rates, high fees and closing costs. 

If you’re looking for a long-term investment solution or want to renovate a property to put on the rental market and appreciate over time, hard money loans aren’t the right solution for you. They’re also not ideal for anyone financing their first rental home. 

Can I use the equity in my home to finance a down payment for an investment property?

Home equity is the difference between what your home is worth and how much debt is owed against it. When your house appreciates and/or you have paid off a chunk of your mortgage principal — you have equity. This value can be drawn from to finance a down payment for another property which can be used on the rental market to help pay down the loan. 

Once you own at least 15% - 20% of your home’s value, you may be eligible for:

1. Cash-out refinancing
2. Home Equity Loan
3. Home Equity Line of Credit (HELOC) 

Another type of equity loan is the reverse mortgage or Home Equity Conversion Mortgage (HECM) for Purchase, available to homeowners over the age of 62. We have not detailed this as a financing option because it’s only available to owner-occupiers and a reverse mortgage can be canceled if you leave the premises and rent it out.

1. Cash-out refinancing 

A cash-out loan refinancing involves taking out a new mortgage on your home for more than what you currently owe — receiving the difference in cash. You can use the cash-out refinance funds as a down payment on a new investment property or buy the property outright. 

This could be especially helpful if you need to pay out an existing mortgage or buy out siblings to gain full ownership of an inherited home. 

The amount of money or equity you can cash out will depend on the current value of your home and your current loan balance. You will need more than 30% equity to cash out, and you can borrow up to 80% of your home equity. Consider that a cash-out refinance means you will have new loan terms and incur closing costs and fees. These will need to be factored into your rental cash flow analysis. 

2. Home Equity Loan 

A Home Equity Loan allows you to borrow against the value of your home, with the money delivered as a lump sum. Home equity loans have a fixed interest rate and set monthly payments. These loans are ideal for major renovations and investing to improve the value of the home. They can also be used to build an investment portfolio. 

There is one key drawback to consider if you choose a home equity loan. If your home decreases in value, you could end up underwater on the loans, which would be that you can’t move or sell your home without paying money to your lender. If that risk is acceptable to you, a home equity loan can be a good financing option for an investment property. 

3. Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit or HELOC allows you to draw funds as needed and repay the money at a variable interest rate. Some real estate investors use the equity in one rental home to finance another and grow their portfolio. But more commonly, owners of rental property use a HELOC to finance capital improvements or renovations, improving the market value of their home to maximize their rental income and appreciation opportunities.

HELOCs offer flexibility in your budget over taking out a specific loan amount. For example, you don’t need to borrow and pay interest on $50,000 if you only end up spending $40,000 (and you don’t need to find more funds quickly if you go over budget). 

This flexibility could have a big impact on your cash flow by keeping repayments to a minimum. It’s worth noting that the full amount that you’re eligible to borrow will be considered under your debt-to-income ratio, even if you don’t use the full amount. 

Belong offers innovative financial solutions to homeowners

Belong partners with homeowners to make sure your rental home is achieving the best possible price and is cared for by great residents — without you having to lift a finger. From finding long-term residents to financing solutions, we’ve got you covered. 

For Belong homeowners who face unexpected costs, you’ll be eligible for our innovative financial solutions such as ‘Split It’. Split It lets you finance costs like renovations and repairs, with repayments spread across the term of your resident’s lease. With guaranteed rent in place, you’ll never have to worry about gaps in your rental income or missing finance repayments. 

Learn more and find out if your home is eligible here.