Lenders want bigger down payments, higher credit scores, and proof you can handle the monthly payments even if the place sits empty for a while.

Once you understand your options, financing a rental property becomes much simpler. This guide breaks down every investment property loan type, shows you what lenders actually look for, and gives you the real numbers you need to make smart decisions.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Quick Rental Property Financing Facts (Save These)

• Most rental property loans need 15–25% down
• Your credit score should be 620 or higher (680 is better)
• Lenders count only 75% of expected rent as income
• Interest rates run 0.5–0.75% higher than regular home loans
• You'll need 6 months of payments saved as backup cash
• FHA loans let you buy a 4-unit place with just 3.5% down (if you live in one unit)
• Owner-occupied rental properties typically get better rates

Why Buy a Rental Property? (Is It Worth It?)

Let's start with the big question: Why do people buy rental properties?

Monthly income that covers your mortgage. A good rental property brings in enough rent to pay the mortgage, property taxes, insurance, and maintenance, with money left over. That extra cash is your profit every single month.

Property values go up over time. Real estate typically increases in value. A house you buy today for $200,000 might be worth $243,000 in five years (~4% appreciation rate; national average is 3–5%). That's $43,000 in your pocket when you sell (minus selling costs).

Tax breaks that matter. The IRS lets you deduct mortgage interest, property taxes, repairs, and even the property's depreciation. These deductions can save you thousands every year.

Your tenants pay off your loan. Every rent check pays down your mortgage balance. In 15–30 years, you'll own the property free and clear—all while tenants covered most of the cost.

Here's a realistic example:

Buy a $200,000 rental property with 20% down ($40,000) and a 7% interest rate. Your monthly mortgage payment is about $1,065. Property taxes, insurance, and maintenance might add another $600. Total monthly cost: $1,665.

If you charge $2,000 rent, you make $335 profit each month. That's $4,020 per year. After five years, you've made $20,100 in rental profit, plus the property value has increased by $43,000. Your $40,000 investment turned into $63,100.

Not bad for letting someone else live in a house you own.

Know Your Credit Score Before You Start

Your credit score determines which loans you can get and how much they'll cost you.

Most lenders require a credit score of 620 or higher for rental property loans. But here's the catch—a 620 score gets you approved with 25% down. If you want to put down just 15%, you'll usually need a 700 score.

Higher scores save you serious money. A borrower with a 760 score might get a 7% interest rate. Someone with a 640 score might pay 8% or more. On a $200,000 loan, that 1% difference costs you roughly $110 extra every month. Over 30 years, it costs you about $39,434 more than the lower rate.

Your credit score might seem like just a number. But for rental property loans, it's the difference between approval and rejection, between a good deal and an expensive one.

How Much Money Do You Need Up Front?

Let's talk about the cash you'll need to buy a rental property.

Minimum down payments run 15–25% of the purchase price. For a $200,000 property, that's $30,000 to $50,000. It’s much more than the 3–5% you might pay for a home you live in because lenders see rental properties as riskier. They want you to have more skin in the game.

The number of units affects your down payment, too. One rental house typically requires 15–20% down. A fourplex can be 25% or more.

Closing costs add another 2–5%. On that same $200,000 property, budget $4,000 to $10,000 for things like appraisal fees, title insurance, loan origination charges, and attorney fees.

Reserve requirements mean extra cash in the bank. Most lenders want to see six months of mortgage payments sitting in your account after you buy the property. On a $1,700 monthly payment, that's $10,200 just sitting there as backup. This protects the lender if your rental sits empty or if major repairs arise.

Add it all up: down payment + closing costs + reserves. For a $200,000 rental property with 20% down, you need about $54,200–$60,200 in cash to close.

But wait—there are ways to lower these numbers. Keep reading.

Best Loan Options for Rental Properties

You have more investment property financing choices than you think. Each loan type is better suited to different situations.

Conventional Mortgages: The Standard Route

These are regular bank loans that follow Fannie Mae and Freddie Mac rules. Most rental property investors use conventional mortgages because they're straightforward.

Here's what you need:

• Credit score of 620 or higher (680 for smaller down payments)
• Down payment of 15–25%
• Debt-to-income ratio below 45%
• Proof of rental income potential
• Cash reserves covering 6 months of payments

The interest rate runs about 0.5–0.75% higher than loans for homes you live in. On a $200,000 loan, that difference costs you about $55–$82 more per month. Over 30 years, that's about $19,800–$29,520 in extra interest. If you need a jumbo loan, the rates are even higher.

The higher rate is because lenders know that if money gets tight, you'll pay the mortgage on your house before you pay the one on your rental property.

Fixed-rate or adjustable? Most investors choose fixed-rate mortgages. Your payment stays the same for 15 or 30 years. Adjustable-rate mortgages (ARMs) start with a lower rate for 5–10 years, then adjust based on market conditions. Great if you plan to sell quickly. Risky if you're holding long-term.

Conventional mortgages work well when you have good credit, steady income, and enough cash for a solid down payment.

Use Your Home's Equity: HELOC and Cash-Out Refinance

If you already own a home, the equity you've built can fund your rental property purchase.

Home equity = your home's value minus what you owe. If your home is worth $300,000 and you owe $150,000, you have $150,000 in equity. You can borrow against some of that equity to buy a rental property. (Generally speaking, the bank requires you to keep 20% equity in your home.)

Home equity loans give you a lump sum with a fixed interest rate. Borrow $50,000, get $50,000 in cash, then pay it back over 10–20 years with the same monthly payment every time. Simple and predictable.

HELOCs work like a credit card backed by your home. You get approved for a credit line (say, $75,000), then withdraw money as needed. Only pay interest on what you actually borrow. HELOCs have variable interest rates that fluctuate with the market.

Cash-out refinancing replaces your current mortgage with a bigger one and gives you the difference in cash. Your home is worth $300,000, and you owe $150,000. Refinance for $230,000, pay off the old $150,000 loan, and pocket $80,000 (minus closing costs). You now have one mortgage payment instead of two.

Which option saves you money? That's a math problem based on current interest rates and how much you need. A mortgage expert can run the numbers for your specific situation.

Here's the big warning: if you can't make the payments, you could lose your primary home. That's a serious risk. Only tap your home equity if you're confident the rental property will generate enough income to cover its mortgage.

FHA Loans for Multi-Family Properties (Live in One, Rent the Rest)

If you want to put down just 3.5% instead of 20%, FHA loans make it possible if you live in part of the property.

House hacking explained: Buy a duplex, triplex, or fourplex with an FHA loan. Live in one unit, rent out the others. Your tenants' rent covers most (or all) of your mortgage payment.

The requirements:

• Credit score of 580 or higher for 3.5% down (500–579 needs 10% down)
• You must live in one unit as your primary residence
• Maximum 4 units (5+ units are classed as commercial real estate)
• The property must meet the FHA safety and condition standards

Here's how the numbers work:

Buy a $320,000 duplex. Put down 3.5% ($11,200). Your mortgage payment runs about $2,570 per month, including taxes, home insurance, and mortgage insurance. Rent out the other unit for $1,400. Your actual housing cost is just $1,170 per month.

After a year, you can move out and rent both units. Your FHA loan stays in place with its low down payment and interest rate. Now both units generate income. $2,800 per month is more than enough to cover that $2,570 mortgage.

The catch: FHA loans require mortgage insurance that adds to your monthly payment. It also stays with the loan for the entire duration, not just until you reach 20% equity. You have to refinance to get rid of FHA mortgage insurance.

FHA loans are usually thought of as first-time homebuyer loans, but they can work as first-time investor loans, too.

VA Loans for Veterans

Active-duty military, veterans, and some surviving spouses can buy rental properties with zero down payment using VA loans.

What makes VA loans special:

• No down payment required (0%)
• Lower interest rates than conventional loans
• No mortgage insurance required
• Up to four units allowed
• You must live in one unit

The rules are similar to FHA house hacking. Buy a multi-family property, live in one unit, rent the others. The difference is that VA loans don't require a down payment.

Buy that same $320,000 duplex with $0 down. Your mortgage payment is about $2,500 monthly. Rent covers $1,400. You're living for $1,100 per month while building equity in a property you'll own free and clear in 30 years, and you didn't have to make a down payment to do it.

Portfolio Loans: When Banks Keep Your Loan

Portfolio loans follow different rules because the lender retains them rather than selling them to investors.

What makes these different? Big banks usually package loans and sell them to Fannie Mae or Freddie Mac. But they can only package loans that conform to Fannie and Freddie's rules.

Portfolio lenders keep your loan in their own portfolio. This gives them flexibility to bend the rules.

Who should consider portfolio loans?

• Self-employed people with complicated income
• Investors buying multiple properties
• People with credit scores below 620
• Anyone who doesn't fit standard lending boxes

Portfolio lenders typically care more about the rental property's income potential than your perfect credit score or tax returns. If the property generates strong cash flow, they're more likely to approve you even if your personal finances are messy.

The downside? Interest rates are higher—sometimes 1–2% above conventional loan rates. You might also pay higher fees. But if you can't get approved anywhere else, portfolio loans provide a path to property ownership.

Hard Money Loans: Fast But Expensive

Hard money loans are issued by private companies or individual investors. They approve loans in days instead of weeks, but you'll pay significantly for the speed.

When hard money makes sense:

• You're flipping a house and need fast financing
• The property needs major repairs (banks usually won't lend on fixer-uppers outside a few special loan programs)
• You're buying at auction
• Traditional lenders rejected you

What you'll pay:

• Interest rates of 8–15% (sometimes higher)
• Points: 2–5% of the loan amount paid upfront
• Short terms: 6–24 months
• Down payments: 20–30%

Hard money loans work as bridge financing while you fix up a property, then refinance into a regular mortgage. They're temporary—and expensive—solutions. Don't use hard money for long-term rental properties unless you have no other choice.

Private Money and Seller Financing

Sometimes the best financing comes from people instead of banks.

Private money loans come from friends, family, or business partners willing to lend you cash. You agree on the interest rate, payment schedule, and loan terms. Everything is negotiable.

Seller financing means the property owner acts as your lender. Instead of getting a bank loan, you make payments directly to the seller. They keep the deed until you pay off the loan. Since it's still private money, everything is negotiable.

Why would a seller do this? Maybe they own the house free and clear and want a steady monthly income. Maybe the property needs repairs that make bank financing impossible. Maybe they want to avoid a big tax hit from selling all at once.

Seller financing usually requires some down payment (10–20%) and has a shorter payoff period (5–10 years) with a balloon payment at the end. You'll refinance with a bank before that balloon payment comes due.

Get Approved: What Lenders Actually Look For

Banks don't just hand out rental property loans to anyone who asks. Here's what they check before approving a mortgage.

Rental income potential matters more than you think. Lenders want proof that the property can generate enough rent to cover the mortgage. They'll look at comparable rentals in the area or require an appraiser to estimate rental value.

Here's the key number: lenders usually only count 75% of projected rent toward your qualifying income. That’s because they assume the property will sit empty at times, or that you'll have maintenance costs that eat into your rent.

If a property should rent for $2,000 monthly, the lender only credits you with $1,500 when calculating whether you can afford the loan.

The debt-to-income ratio (DTI) should be below 45%. Add up all your monthly debt payments (credit cards, car loans, student loans, current mortgages). Divide by your gross monthly income. The result should be 45% or less.

Cash reserves protect you—and the lender. Most lenders require six months of mortgage payments to be in your account after closing day. This cushion covers you if the rental sits empty or major repairs pop up.

Smart Strategies to Make Financing Easier

A few smart moves can improve your loan terms and save you thousands.

Put Down More Than 15% If You Can

Every extra dollar you put down saves you money in two ways:

Lower interest rates. Lenders give better rates when you have more equity in the property. Over 30 years, even small differences save you thousands.

Smaller monthly payments. Borrow less money, pay less every month. Put down $40,000 instead of $30,000 on that $200,000 rental, and your monthly payment drops by about $67. That's roughly $800 in extra cash flow from your rental each year.

Skip private mortgage insurance (PMI). Put down less than 20% on most loans, and you'll pay PMI—extra insurance that protects the lender if you default. It has its own calculation formula, but generally speaking, PMI adds $50–$200+ to your payment each month and doesn't benefit you at all. Putting down 20% or more eliminates this waste.

Use Projected Rent to Qualify for More

Remember how lenders count 75% of expected rental income? Use this to your advantage.

Get documentation showing what similar properties rent for in the area. The stronger your rental income numbers, the more buying power you have. A property that rents for $2,400 monthly adds $1,800 (75% of $2,400) to your qualifying income.

That extra $1,800 might be the difference between approval and rejection if your debt-to-income ratio is borderline.

Some lenders want a signed lease agreement if the property already has tenants. Others accept an appraiser's rental schedule. Ask your lender what documentation they prefer.

Avoid These Financing Mistakes

Don't let these common errors derail your rental property investment.

Buying before checking rental demand. Just because you can buy a property doesn't mean you can rent it. Research vacancy rates and typical rental prices in the area. Talk to local property managers. Visit the neighborhood at different times of day. Ensure there is actual demand for rentals.

Ignoring property managementrepaint. Budget 8–15% of monthly rent for maintenance and repairs, depending on the property's age and condition. Capital expenditures, such as roof replacements, should have a separate budget. Factor in property management fees if you're hiring someone (typically 8–12% of rent). These costs eat into your profit every single month.

Overestimating rental income. Don't assume you'll charge top-market rent. Don't assume the property will stay rented 12 months every year. Plan for one to two months of vacancy each year and charge slightly below-market rent to keep good tenants longer.

Not keeping enough cash reserves. The lender requires six months of payments in reserve. Smart investors keep 12 months. You need money for unexpected repairs, periods without tenants, and economic downturns. An empty bank account forces you to sell at the worst possible time or lose the property to foreclosure.

Think long-term. One bad month shouldn't destroy your investment.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

Determining the Best Way to Finance a Rental Property

Financing a rental property is different from buying a home you'll live in. You need more cash upfront, better credit, and higher reserves. Lenders charge more and expect more.

But the financing options are there. Conventional loans, FHA house hacking, VA loans for veterans, home equity options, portfolio loans, and even hard money when needed. Pick the loan that matches your situation, your credit, and your down payment capabilities.

The smartest move is to talk to a mortgage lender who works with real estate investors. They'll run the numbers for your specific situation and show you exactly which loan saves you the most money.

Don't let financing confusion stop you from investing in a Nashville rental. The knowledge you need is all here. Now you need to take the first step.

FAQ: Rental Property Financing Questions

Is it hard to get a loan for a rental property?

It’s harder than getting a loan for a home you'll live in, but not impossible. Lenders want bigger down payments (15–25% instead of 3–5%), higher credit scores (620+ instead of 580), and proof you can cover the mortgage. If your credit is solid, you have cash for the down payment, and your income supports the additional debt, approval is straightforward.

Can I put less than 20% down on a rental property?

Yes. Some conventional loans accept 15% down if you have a 680+ credit score. FHA loans let you buy a 2–4 unit property with just 3.5% down if you live in one unit. VA loans for eligible veterans require 0% down for multi-family properties where you occupy one unit. Portfolio lenders and private money sources might also accept less than 20% down.

What credit score do I need for a rental property loan?

Most lenders want 620 or higher. Some allow scores as low as 580 for FHA multi-family loans. But remember: higher scores save you money. A 680 score gets you better terms than 620. A 740 score gets even better rates. Each small decrease in your rate saves you thousands of dollars over the life of your loan.

How much profit should a rental property make?

After all expenses (mortgage, taxes, insurance, maintenance, vacancy), aim for at least $200–400 monthly profit per property.

What's the 1% rule in real estate investing?

Monthly rental income should be at least 1% of the total purchase price of the property. It's a quick screening tool to spot potentially profitable investments. A $150,000 property should rent for $1,500 monthly. A $300,000 property should rent for $3,000. Properties that don't meet the 1% rule might still work, but they need closer analysis to ensure they'll generate positive cash flow.

The 1% rule should be used to narrow down your list, not as the only qualifier. You'll want to run numbers as close to reality as possible to make sure the property really will be profitable before committing to the purchase.