Real estate investing is one of the most proven wealth-building strategies in history. But investment property financing is meaningfully different from financing a primary home.
How Investment Property Financing Differs
Larger down payment: Most conventional investment property loans require 15–25% down (vs. 3–5% for primary homes).
Higher rates: Investment properties carry a rate premium of 0.5–1.0% over comparable primary residence loans, because default rates are higher when borrowers are in financial distress.
Reserve requirements: Most lenders require 6 months of PITI reserves for each investment property you own.
Stricter DTI: Investment property income can be used to offset the new payment, but typically only at 75% of gross rents (accounting for vacancy and maintenance).
Types of Investment Property Financing
Conventional investment loans: Most accessible. Requires 15–25% down, follows Fannie/Freddie guidelines, max 10 financed properties.
DSCR loans: Qualify based on property cash flow, not personal income. Higher rates but no personal income documentation.
Portfolio loans: Lender holds the loan themselves; more flexibility on terms and qualification.
Hard money loans: Short-term, high-rate loans used for fix-and-flip. Not for buy-and-hold.
Analyzing a Rental Property
Key metrics:
- Gross yield: Annual rent ÷ purchase price
- Net yield (cap rate): NOI (rent minus expenses) ÷ purchase price
- Cash-on-cash return: Annual cash flow ÷ cash invested
- Break-even ratio: Operating expenses + debt service ÷ gross income
For most SoCal markets, cash-on-cash returns on traditional rentals are modest (3–5%) due to high prices. Appreciation and equity paydown are the primary wealth drivers.
Rick’s Investment Approach
We have helped many clients use the equity in their primary home to purchase their first investment property. A cash-out refinance or HELOC can fund the down payment on an investment property — effectively using one asset to acquire another.
This strategy has helped numerous 5 Point Capital clients build meaningful real estate portfolios starting from a single home.