In Part 4 of this series, we explored the importance of due diligence when evaluating rental properties. With that groundwork laid, we now turn our attention to another critical component of a successful investment: financing. The structure of your loan not only determines your upfront costs and monthly expenses, but also your ability to withstand market fluctuations and sustain long-term growth. In this installment, we’ll examine the primary financing options for 1–4 unit residential properties and share insights into the strategies we’ve adopted over the years.

Conventional Financing – The Backbone of Our Approach

Conventional financing has been our preferred route for the majority of our acquisitions. These federally insured, 30-year fixed-rate mortgages are a unique feature of the U.S. housing market and are generally available only for 1–4 unit residential properties. Borrowers may qualify for up to ten such loans, making them a foundational tool for small-to-medium scale investors.

Qualifying for a conventional mortgage typically requires income verification, a sufficient credit score, and a manageable debt-to-income ratio. Importantly, the property itself must be in habitable condition. Lenders will not issue conventional loans for properties that require extensive rehabilitation or are deemed uninhabitable at the time of purchase.

The advantages of conventional loans are numerous. A 30-year fixed rate provides long-term predictability and acts as a hedge against rising interest rates—protecting you from the risk of being forced to refinance in a tighter lending environment, during a market downturn, or under less favorable personal financial circumstances where you may not qualify. We’ve also found the ability to refinance these loans opportunistically, without prepayment penalties, to be a valuable strategic option. For example, one of our properties originally financed in 2013 at 5.875% 30 year fixed rate loan was subsequently refinanced twice, ultimately locking in a 3.0% fixed rate for 30 years.

We deliberately maintain a conservative financing approach. Although cash-out refinances are often available, we generally decline them in favor of preserving equity and ensuring that the properties are projected to cash flow even in difficult environments. This strategy contrasts with more aggressive investors who used maximum leverage and variable-rate financing – these can be useful in scaling quickly if successful, but can also expose the investor to downturns and quick changes in the financing and real estate market environments – for example, in the 2020 and 2021 timeframe, many apartment investors were buying apartments with short-term, variable rate debt, and many of those investments ended up in distress due to the rapid rise in interest rates and falling apartment values from 2022 through today.

Hard Money Loans – A Tactical, Short-Term Tool

Hard money loans can serve as a useful tool under the right circumstances for 1-4 unit residential properties, especially when dealing with distressed properties or tight timelines. They are commonly used when a property does not qualify for conventional financing due to its condition, or the borrower has limited liquidity to fund a rehab (or prefers less money out of pocket generally).

One of the key benefits of hard money loans is that the lender may allow you to roll a significant portion of the rehab costs into the loan. Additionally, many hard money lenders provide oversight in preparing the scope of work and during the construction phase through a draw process, which can help ensure the rehab progresses in accordance with the plans.

However, these advantages come with considerable costs. Interest rates are typically 2–5 percentage points higher than conventional loans, and borrowers often pay 1–3% in origination fees, along with larger processing and administrative costs. The loan durations are short—usually from a few months up to two years—and the ultimate goal is to refinance into a more affordable, long-term loan. This means incurring a second round of closing costs and lender fees, and depending on the length of the rehab, taking additional risk in terms of changing lending and real estate environments with the eventual refinancing of the property into a conventional loan down the road.

While hard money financing can be a great solution for investors who know how to utilize it appropriately, we have chosen not to use it. Our liquidity has allowed us to finance rehabs directly, avoiding the extra cost and complexity that comes with this type of borrowing.

Portfolio Loans – An Option for Scaling Beyond Conventional Limits

For investors who have reached the limit of ten conventional mortgages or who own properties that generate strong cash flow but fall outside conventional guidelines, portfolio loans can offer an alternative path. These loans are held by the lending institution rather than being sold to the secondary market, giving the lender more flexibility in underwriting.

Portfolio loans tend to focus more on the performance of the asset—specifically, the property’s debt service coverage ratio—than on the borrower’s personal income. They can be particularly useful for growing a portfolio quickly after reaching conventional loan caps.

That said, they also come with trade-offs: interest rates are higher, origination points may be charged, prepayment penalties are common, and significant reserve funds are often required. For these reasons, we have not yet utilized portfolio loans in our strategy, but we recognize their value for investors seeking to scale more aggressively.

Our Financing Strategy – Stability and Discipline

Our financing philosophy emphasizes stability, sustainability, and risk management. The majority of our 1–4 unit properties are financed using 30-year fixed-rate loans, allowing us to lock in predictable payments and avoid the volatility associated with variable-rate structures. We have never used adjustable-rate mortgages, nor have we relied on hard money or high-leverage strategies.

Instead, we’ve grown our portfolio incrementally, funding renovations with cash or through strategic use of a home equity line of credit (HELOC) on our primary residence. When we have used the HELOC, it has been for clearly defined, short-term purposes, with a plan in place for prompt repayment.

This disciplined approach has allowed us to maintain financial flexibility and take advantage of favorable refinancing opportunities when interest rates drop—without the burden of prepayment penalties that often accompany loans for larger multifamily properties.

Best Practices for Conventional Loan Success

If you choose to pursue conventional financing, preparation and organization are key. Buyers generally get loan pre-approval before making offers. This process typically takes just 1–2 business days after submitting a completed application and supporting documents and can significantly strengthen your negotiating position.

It’s also important to manage your finances carefully during this process. Avoid making large deposits, transferring funds between accounts, or taking on new debt without first consulting your lender. Lenders are required to verify the source of your down payment and any sudden or unverified activity may complicate or delay the underwriting process.

Additionally, avoid major life changes such as changing jobs or making large purchases during this period. Always respond to lender requests promptly and do not assume your agent or broker is communicating with your lender on your behalf—stay actively involved.

Finally, remember that conventional financing is only available for habitable properties. Ensure that the property you are pursuing meets this standard and will appraise appropriately. In highly competitive markets, we’ve occasionally chosen to purchase with cash and refinance afterward, which has helped us win bids and meet tight 1031 exchange deadlines. This approach requires liquidity but can be an effective way to close quickly and strengthen your offer.

In Part 6 of our series, we’ll shift from financing to the final stages of acquisition, including preparing for renovations and managing the rehab process itself. Whether you're buying fully rehabbed properties or planning major improvements, it’s critical to begin with a clear plan, budget, and team to ensure your investment stays on track and within scope.

Stay tuned as we continue this journey through the complete rental property acquisition and ownership lifecycle.