Chapter 6: Financing an investment property
Walk into a lender's office to buy a home for yourself and the quote in June 2026 is about 6.55%. Mention that the same house will be a rental and the quote moves to roughly 7.05–7.55%. The building did not change; the risk did. When money gets tight, people default on the rental before the roof over their own kids, lenders price that ordering, and every loan in this chapter is some arrangement of three dials: how much cash down, what rate, and whose income has to carry the debt. There are five honest doors into an investment property. Each one fits a different buyer, and picking the wrong door costs more than picking the wrong paint, the wrong agent, and the wrong tenant combined.
One definition first, because every door uses it. PITIA is the full monthly cost of a mortgaged property: principal, interest, taxes, insurance, and association dues if any. When a lender tests whether you or a building can carry a loan, PITIA is the weight on the bar.
The menu
15% down (1 unit), 25% down (2–4 units), rate +0.5–1.0%
The standard Fannie and Freddie route. Minimum 15% down on a single-family rental with roughly 680+ credit, 25% on two-to-four units, with the best pricing near 25% down either way. Rates run 0.5–1.0% above primary-home rates, so figure 7.05–7.55% in June 2026. Lenders commonly want about six months of PITIA in reserves. Fits the W-2 borrower buying doors one through a few: Marcus and Tina put 25% down and locked 7.3%, and their paychecks, not the house, qualified for the loan.
FHA 3.5% down or conventional 5%, near-primary rates
Live in one unit of a two-to-four-unit building and you can finance the whole thing as your home: FHA at 3.5% down or conventional owner-occupied programs at 5%, at rates near the 6.55% primary baseline. The price of admission is real: a one-year occupancy commitment, and, on FHA three-to-four-unit purchases, a math gate called the self-sufficiency test, worked through below. This is the cheapest leverage in American real estate, and it is reserved for people who actually move in.
20–25% down, ratio of 1.0–1.25 required, rate +0.75–2.0%
DSCR loans qualify the property instead of the person: no tax returns, no W-2s, just the building's income against its payment, with a minimum debt service coverage ratio between 1.0 and 1.25 depending on the lender. Expect 20–25% down, rates 0.75–2.0% above conventional investor pricing (roughly 7.8–9.55% now), and three to twelve months of reserves. Fits the self-employed and anyone scaling past what their tax returns can support. Sofia's fourplex is traced below.
Two more doors round out the menu, and both come with warnings attached. They get their own sections after the worked examples.
The self-sufficiency test, worked
FHA's 3.5% down on a three- or four-unit building comes with a gate: the self-sufficiency test. Take the market rents for all units, including the one you will live in, as estimated by the appraiser. Multiply by 75%. If that number does not cover the entire PITIA payment, FHA will not insure the loan, no matter how strong your income is. The test exists to keep buyers with 3.5% of skin from strapping themselves to a building that cannot feed itself.
Alana ran into the gate in person. Before her duplex, she fell for a $600,000 fourplex. The arithmetic that ended the romance: 3.5% down is $21,000, and the loan, with FHA's financed upfront mortgage insurance premium, comes to about $589,100. At 6.5%, principal and interest run about $3,724 a month, monthly mortgage insurance adds about $270, and taxes and insurance about $850. Full PITIA: $4,844. Market rents were $1,400 per unit, $5,600 total, and 75% of that is $4,200. The test fails by $644 a month, so the building was ineligible at 3.5% down for her or anyone.
Her $420,000 duplex told a different story. The self-sufficiency test only applies to three and four units, so the duplex skipped it entirely, and approval rode on her income plus rent credit. Her full payment including mortgage insurance is $2,830. The appraiser set market rent for the second unit at $1,750, the lender counted 75% of it, $1,312 a month, and her qualifying picture became $2,830 against $7,083 of salary plus $1,312 of rent credit: a 34% housing ratio, inside FHA's box. She was approved and moved in, and Chapter 8 traces what the building does to her cost of living.
Alana keeps the fourplex worksheet taped inside a kitchen cabinet as a souvenir. "The lender didn't reject me. The math rejected the building, and it took four lines of arithmetic to find out. The duplex passed every test the fourplex failed, and I stopped being insulted by the rules once I understood the rules were about whether the building could survive me losing my job."
One sentence in this section has no soft version. Telling a lender you will occupy a property when you will not, to capture 3.5% or 5% down and a primary-home rate, is occupancy fraud, a federal crime that lenders actively audit with utility records, mail checks, and drive-bys. The discount exists because you live there. Earn it or pick another door.
DSCR, traced on Sofia's fourplex
Sofia has three rentals and a self-employment tax return that makes conventional underwriters sigh. Her fourth purchase, the $650,000 fourplex from Chapter 4, went through a DSCR lender who asked one structural question: can the building pay its own loan with room to spare.
The building's honest NOI is $52,506 a year. At her quoted 8.0% over 30 years, two down payments produce two different answers:
| Down payment | Loan | Payment | Annual debt service | DSCR |
|---|---|---|---|---|
| 20% ($130,000) | $520,000 | $3,816/mo | $45,792 | $52,506 ÷ $45,792 = 1.15 |
| 25% ($162,500) | $487,500 | $3,577/mo | $42,924 | $52,506 ÷ $42,924 = 1.22 |
Her lender's floor was 1.20. At 20% down the deal scores 1.15 and dies in underwriting; at 25% it scores 1.22 and closes. The extra $32,500 of down payment was not a preference, it was the price the ratio demanded. The lender also required six months of PITIA in reserves, about $21,500 she had to show and keep.
Price the convenience honestly. Sofia pays 8.0% against the 7.3% Marcus and Tina locked conventionally, roughly $3,400 a year of extra interest on her starting balance in exchange for never producing a tax return. For her, with income that is real but paper-ugly, that is a fair trade and the only available one. For a W-2 borrower who could qualify conventionally, paying the DSCR premium is buying a ticket to a show they could enter free.
The risk stack: HELOC and cash-out down payments
Some buyers fund the down payment by borrowing against their own home with a HELOC (home equity line of credit) or a cash-out refinance. Understand exactly what this builds: a rental financed 100% with borrowed money, where the second loan is secured by your kitchen. Run it on the shared example. A buyer who pulls Marcus and Tina's $60,000 down payment from a HELOC at, call it, 8.5% variable owes about $425 a month in interest alone. The house's honest cash flow is already −$140; the HELOC turns it into −$565 a month, $6,780 a year, on a rate that can rise. Now a vacancy at the rental presses directly on the home where you sleep.
The honest rule: equity-funded down payments belong only on deals that cash flow positive after the equity payment is counted, held by owners with reserves for both properties. Used that way, a HELOC is a bridge. Used to force a negative deal to happen, it is a margin loan with a garage.
Seller financing and assumables, in one honest paragraph
Sometimes the seller becomes the bank: you sign a note directly, often with a balloon payment due in five to ten years, which means refinance risk on a date you do not control. It is rare, legal, and occasionally excellent, mostly when a seller owns the property free and clear and wants income instead of a lump sum. Use a real estate attorney, record everything, run title and escrow like a normal closing, and underwrite the property with the same honest stack, because creative financing does not repair bad NOI. Assumable loans (FHA and VA notes can transfer to a buyer) carry the same caveat from the other side: assuming a 3% pandemic-era loan sounds like alchemy until you price the cash needed to buy out the seller's equity above the loan balance.
Cash, and the refinance behind it
Paying cash wins speed, certainty, and every bidding war tiebreaker, and it deletes debt-service risk entirely: on Marcus and Tina's house a cash buyer simply earns the 5.5% cap rate as a 5.5% cash-on-cash, positive from month one. The cost is concentration and dead leverage. The useful middle path is Fannie Mae's delayed financing rule, which lets a cash buyer take a cash-out mortgage within six months of closing, restoring liquidity after the cash offer did its negotiating work. Buy with cash, finance with paperwork, keep both advantages.
How lenders count rent, and how many loans you get
Whatever door you pick, lenders give rental income a haircut: they count about 75% of rents toward your qualifying income, with the other 25% standing in for vacancy and expenses. For a property you are buying, a new landlord leans on the appraiser's market-rent estimate, taken at 75%. Income from rentals you already own generally needs to show up on your tax returns, which is why your second purchase is administratively easier than your first: by then Schedule E does the talking.
Conventional lending also has a ceiling: ten financed properties per borrower, with pricing, credit, and reserve requirements tightening well before you reach it. Past that line, DSCR and portfolio lenders take over, which is exactly the road Sofia is on.
Pick the loan before the house. If you can occupy for a year, the house hack rate and down payment beat everything else on the menu. If you cannot, use investor conventional while your income qualifies, DSCR when it does not, and treat HELOCs, seller notes, and cash as tools that still have to pass Chapter 4's math. No loan fixes a building that cannot pay for itself.
Key takeaways
- Investor conventional runs 15% down on one unit and 25% on two to four, at 0.5–1.0% above primary rates with roughly 680+ credit; Marcus and Tina's 7.3% with 25% down is the standard play for W-2 borrowers.
- Owner-occupied loans (FHA 3.5%, conventional 5%) are the cheapest entry, and FHA three-to-four-unit deals must pass the self-sufficiency test: Alana's $600,000 fourplex failed it by $644 a month, while her duplex never faced it. Faking occupancy is federal mortgage fraud.
- DSCR loans qualify the building, not you: 20–25% down, a 1.0–1.25 minimum ratio, and rates 0.75–2.0% above investor conventional. Sofia's fourplex needed 25% down to lift its ratio from 1.15 to 1.22.
- Lenders count about 75% of rent toward qualifying income, and conventional financing caps out at ten financed properties, tightening well before that.
- HELOC down payments stack your home under the rental's risk: on the shared example, a $425 monthly equity payment turns −$140 of cash flow into −$565. Equity money belongs only on deals that stay positive after carrying it.
Sources: Fannie Mae Eligibility Matrix · HUD FHA single-family announcement · CFPB: Owning a Home · Finvest Home Buying Guide