What Is an Investment Property Loan in the U.S.?

In the U.S., investment property loans are offered to investors who are looking to purchase or refinance real estate for rental income or capital gains, rather than for personal residence. These loans differ from owner-occupied mortgage loans in underwriting standards, qualifications, and available programs.

When referring to “investment property” in the U.S., it does not refer to the appearance or type of the property but rather to its intended use for rental income. A property that the owner occupies or uses personally is not considered an investment property. Even if a property is commercial, if the owner uses it for their own business, it is classified as owner-occupied, and loan terms may vary accordingly.

The value of investment properties is often determined not by the market price, but by net operating income (NOI) — the rental income minus operating expenses. Therefore, lease agreements are crucial documents for evaluating rental income. The lower the property’s expenses, the higher the profitability, and in turn, the higher the property’s appraised value. The goal of investment property ownership is generally to maximize rental income and minimize expenses.

Another advantage of investment properties is the ability to defer capital gains taxes through a 1031 Exchange, which can be a powerful wealth-building strategy. Additionally, investors can take advantage of depreciation deductions based on the natural wear and tear of the property when filing taxes.

However, U.S. tax and legal systems are very different from other countries, so it is essential to consult a CPA or legal expert familiar with U.S. regulations to avoid potential pitfalls.

Finally, note that vacant commercial properties or land with no income are often very difficult to finance (with some exceptions for residential property). Be sure to plan ahead and seek expert advice early to ensure loan eligibility and optimize your investment strategy.