Finding Real Estate Investor Friendly Banks
Investing in real estate is one of the few dependable ways of growing a large sum of money. No matter what else changes in the world, land will always be valuable and properties will be desired too since people will always need somewhere to live or to run their business.
Real estate investment does come with significant risk, however, so not all banks are interested in lending to property investors. Finding real estate investor friendly banks is the first step towards getting started on this career path.
What Makes Real Estate Investor Friendly Banks?
If you’re looking to invest in some real estate you might be tempted to turn to the bank that you have your personal accounts and mortgage with. While there is some sound logic to this idea, since you have a credit history with that bank and hopefully already have a good relationship with them, your high street bank might not be the best choice for a real estate loan.
Real estate investor friendly banks tend to meet several criteria:
- They offer short term mortgages
- They offer the option to take out a portfolio loan if you are investing in several properties
- They look at the value of the property more than at your personal debt to income ratio
Few people are fortunate enough to be in the position to use exclusively (or almost exclusively) their personal wealth to start a real estate business. Perhaps once you have several properties you might feasibly be able to use the income stream from one of them to build up investments for others. Getting that initial acceptance is difficult, however, and it’s also hard to find good interest rates for short term, high-value real estate loans.
Pre-Approval for A Real Estate Loan
Before you start putting in offers for an investment such as a small multifamily property you need to line up pre-approval from a bank. Sellers will not take offers seriously if they don’t know that the prospective buyer actually has the funds on hand. Pre-approval is a must to ensure that your offers get noticed.
Note that there are two categories of lender for real estate investment. Residential lenders will work with investors that are looking to purchase properties that are four units or smaller. Commercial lenders focus on bigger properties. Know what sort of properties that you are looking for, and select real estate investor friendly banks that deal with that sort of property.
Why Avoid Your Personal Bank?
On paper, it is possible to borrow money for your real estate investments from the same bank as you worked with for your mortgage. It’s generally not a good idea, though. Your personal mortgage lender probably specializes in loans to individuals. They know all about financing primary residences, but investing is an entirely different market. Keeping your personal property and your business property separate will protect you, to an extent, should you run into issues with your investments. You’re also more likely to get good rates from a lender that understands the market.
Banks that target real estate investors understand that those investors want to take out lots of loans, and have lots of properties on the go to maximize their cashflow. They understand the way the risks that investors are willing to take and they know what level of risk is realistic and reasonable. This means that they are more likely to be willing to sign off on multiple, large loans. Real estate investor-focused banks understand LLCs and they are more likely to allow things like quit-claiming a property to an LLC without calling on the loan. If you were to try doing things with a bank that specializes in personal mortgages they would probably want the loan paid back in full.
How to Find a Suitable Lender
Expertise and a willingness to look at the details are two important factors when you are looking for a lender. One good starting point is the Real Estate Investor’s Association. Head to a REIA meeting and talk to other investors. Ask them who they are getting their loans from. Most investors are happy to share and will help newcomers find a good lender.
Always ask for a referral. Often, you will get valuable information from surprising sources. People who have been there, done that are going to be willing to tell you about the good, and bad, experiences that they have had. This can save you from wasting time and money on a lender that is likely to turn you down or charge too much.
You can even target your calls to banks based on ones that are likely to lend in your area.
Use a service such as DataQuick or ListSource to find properties in your target investment area that are owned by a landlord and that have had a loan taken out on them in the last year. It can help to improve your list of potential banks if you also narrow down the property list to ones that are in your price range.
Some banks offer loans that are only of a specific size or have strict lending criteria. The more similar the properties you look at are, the more likely it is that they will be interested in lending to you. Often, when you data mine this way you can find banks that do not advertise particularly actively in the mainstream markets. Neal Funding offers real estate loans in a range of sizes, including small loans and commercial real estate loans too.
Real Estate Loans for Bad Credit Scores
If you have a bad credit score – below 620 – it is going to be very difficult to get a loan but Not Impossible. Some lenders demand credit scores of 700 or higher before they will consider a loan for a traditional mortgage. When it comes to real estate investing it is often a little easier to get a loan, but even then, having a good credit score is going to help.
Unfortunately, it takes years to repair your credit score. You probably don’t want to wait years for a mortgage, though, so you may want to explore some other strategies like hard money loans for bad credit.
Hard money loans can be a good starting point. Hard money lenders offer short-term, real estate backed loans. They aren’t aimed at people who are looking to buy a property to live in, but rather for people who are looking to invest in property to rent out. These lenders look more at the business idea and the expertise rather than the credit score of the person who is trying to take out the loan.
Hard money lenders use the property as collateral. This means that they care more about the bottom line. If you can prove that the property is going to make money then you have a chance of getting a loan even if your credit score is not ideal.
Of course, with a poor credit score, you are likely to pay higher interest rates. A hard loan could range from 8 to 15 percent, with ‘points’ on top. Points are a percentage of the loan and can be between two and four percent of the total amount of the loan.
If you feel that a hard money loan is the only option, then you should shop around and ask for references from any lenders you are thinking of working with. Follow up on the references, and check with the Better Business Bureau too. There are many less than reputable lenders that prey on people with poor credit scores. Finding a reputable hard money lender or a good private money lender will save you headaches in the long term. Neal Funding offers financing for investment properties from $50,000 up to $1,000,000, with bridge loans and loans of up to 80 percent LTV, making them accessible to a wide range of borrowers.