How to Get a Mortgage for Your First Rental Property: A 2024 Guide

Securing financing is the most critical step for new real estate investors. For your first rental property, the optimal strategy is often purchasing as an owner-occupant (OO), which requires living in the property for at least one year but allows for a down payment as low as 3.5%. Alternatively, buying as a non-owner occupant (NOO) typically requires a 20-25% down payment. This guide outlines the financing pathways, costs, and key considerations to help you make an informed decision.

What Is the Easiest Way to Finance a First Rental Property?

The most accessible entry point is to purchase a property as an owner-occupant. An owner-occupant loan is a mortgage for a borrower who intends to live in the property as their primary residence. This approach offers significant advantages:

• Lower Down Payment: Programs like FHA financing (insured by the Federal Housing Administration) may require only 3.5% down, compared to 20-25% for a pure investment property.
• Better Interest Rates: OO loans typically have more favorable interest rates and fees.
• Practical Benefits: You can live in the property, identify any maintenance issues, and complete renovations before converting it to a rental. This strategy also encourages you to be more selective, choosing a property you would personally live in, which often leads to better long-term investment quality.

After fulfilling the residency requirement (usually 12 months), you can move out, rent the property, and the original loan terms remain intact. You can then repeat this process every one to three years to build your portfolio.

What Are the Requirements for a Non-Owner Occupant (NOO) Loan?

If you cannot live in the property, you will need a non-owner occupant (NOO) loan, which is financing for a property the borrower does not intend to occupy. The requirements are more stringent.

• Higher Down Payment: Most lenders require 20-25% down for a single-unit investment property.
• Strong Financials: You will need a good credit score and sufficient income to qualify. Lenders may, however, consider a portion of the property's estimated rental income (the projected rent you can charge) to help you meet debt-to-income ratio requirements, especially if a tenant is already in place.
• Significant Cash Reserves: Beyond the down payment, you must budget for closing costs and potential renovations, which can bring the total initial cash outlay to 30-35% of the purchase price.

What Are the Costs and Interest Rates for Investment Properties?

The costs associated with NOO loans are generally higher than for OO loans. You can expect to pay loan origination points, appraisal fees, underwriting fees, and title insurance (a policy that protects the lender and owner against losses from disputes over the property's ownership). For smaller loan amounts (e.g., under $100,000), these fees can represent a higher percentage of the total loan. Despite higher fees, interest rates for investment properties remain competitive based on current market conditions.

How Many Rental Properties Can You Finance?

Lending criteria become stricter as your portfolio grows:

• 1-4 Properties: Financing is most readily available from conventional lenders.
• 5-10 Properties: The number of willing lenders decreases, and underwriting criteria toughen.
• 10+ Properties: Financing becomes more challenging and is typically handled by portfolio lenders (institutions that hold the loans they originate instead of selling them on the secondary market). Loans in this category often have less attractive terms.

To begin, meet with two to three different types of lenders—such as a bank, a mortgage broker, and an online lender—to compare their NOO programs and offers.

Key Takeaways for Prospective Landlords

Financing your first rental property is achievable with careful planning. Based on our experience assessment, the owner-occupant path offers the most advantages for new investors. If that isn't possible, prepare for larger upfront costs with a NOO loan. Always get multiple loan estimates and conduct thorough due diligence on any property. While real estate investment requires work, understanding your financing options is the first step toward building a solid income stream.