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What is Investment Property Financing?

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  • Written By: Craig G.
  • Edited By: C. Wilborn
  • Last Modified Date: 31 October 2016
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Most real estate can be classified as either residential, commercial, or land. A property is considered an investment property if it is not being used by the owner as a personal residence or principal place of business; investment property could include a rental home or an apartment building. Any money used in securing such a property is considered investment property financing.

Investment property financing is not offered by all lenders. Many lenders only offer financing to buyers who plan to occupy the real estate as their principal residence. To obtain investment property financing, potential buyers must seek lenders that have investment property loan programs. Investment property financing is offered by commercial banks, savings and loan companies, credit unions, insurance companies, and other lenders engaged in real estate lending for business purposes.

The most common investment property loan program is for the purchase of 1-4 unit residential properties. This includes a single family home, duplex, triplex, or fourplex. Any residential property above five units is generally treated by lenders as a commercial property for investment purposes.

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Investment property financing is harder to obtain than conventional loans for several reasons. Since the investor is not living in the property, he or she is more likely to walk away from the loan if the property value drops below the amount of the loan. This situation is called "being underwater." Banks often view investment property loans as high risk loans, and therefore charge a higher rate of interest and offer shorter repayment periods than conventional loans. These loans are also harder to sell on the secondary market.

While an owner typically can not reside on a piece of land alone, he or she could be planning to build a home on that land in which to live. For that purpose, the land would not be considered an investment property; nor would the owner use investment property financing to purchase the land. If the land were being used to build a property which would later be rented or sold for a profit without the owner ever living in it, it would be considered an investment property and the owner could then use investment property financing to purchase the land.

A piece of commercial property that is being used by the owner/buyer alone, such as in a single retail building like a restaurant or car dealership, would be considered an owner-occupied property and not an investment property. If the commercial property were being used by the owner and other tenants, the property would be considered an investment property. Such property could include a strip mall or office building with multiple tenants.

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