Rental Property Loans – 101
Investment in Rental Property is a valuable way to earn income, but purchasing and financing rental property can be a little confusing for newer entrants into the rental market. Rental property is comparable to investments in stocks or bonds, but it requires an understanding of how to finance multiple rental properties for investors to gain the greatest value. Most rental property owners and investors understand the relationship between lower mortgage payments and profitability. Due to the high dollar loans required for many rental property purchases, finding and securing the right loans for rental properties can mean the difference between making a profit or taking a loss on a rental property investment.
Rental Property Investment – Good Idea or Bad?
According to an article published in US News and World Report, ” … a 2017 report from the National Multifamily Housing Council and National Apartment Association indicates an average annual deficit of 200,000 rental units, meaning demand for rental properties is outpacing availability”.1 When demand goes up, so do prices and in the rental property business that’s good news. Taking advantage of the market requires diligence and intelligence. Understanding the risks and rewards is crucial before taking the plunge.
Where to Begin
Like many other commercial loans, a loan on rental property is considered an Investment Property Loan. Some Investment Property loans are for a factory to be constructed or to refurbish a building. All loans involve the extension of credit and that means it’s important to have a good credit score. In most cases, a credit score of 740 or higher is recommended for receiving the lowest interest rates with the most favorable repayment terms. Not that it’s impossible to obtain financing with a lower credit score, but additional costs in the form of higher down payments or higher interest rates on the loan. There are hundreds of commercial loan companies and resources available online, but it’s important to focus on lenders with programs that cover a variety of loan conditions for real estate.
Most commercial lenders require the property owner to have some “skin in the game” or, in other words, that the property owner share in the risk of the investment. Generally, lenders like 20% down payment on an investment property purchase. But there’s more a rental property owner should consider. Lenders like to know if there is a reserve of money available in case the property has vacancies. It’s smart business to plan for rainy days and rental property ownership is no different than any other business. Many investment property deals fail due to a lack of reserves. Lenders know commercial real estate is different from a person’s home. Commercial real estate like rental property comes with greater risks and requires larger down payments than a personal residence.
Frequently, when an investment property is purchased, there’s a need for remodeling, updating, or upgrading. The time required for the improvements may create a cash flow crunch. It’s important to understand and calculate all the contingencies. Lenders will want to know if you’ve got a solid plan they can have confidence in and support. Loans for rental properties should reflect terms and conditions that deal with variables in income due to construction cycles. Remember, investment property loans don’t qualify for mortgage insurance, so there’s no back up if conditions change.
Where To Go For Funding the Loan
Several resources exist which provide mortgages and loans on investment properties. Loans for rental property can be sourced from banks, investment groups, commercial lenders, and even from friends and family. Some rental property loans come from owner-financed transactions, but it is a rare occurrence. For the most part, an investment property loan is best provided by a reliable and knowledgeable source. Due to the tighter credit restrictions and lending requirements through traditional sources like banks and mortgage companies, many rental property owners find it better to work with a commercial lender with experience in the industry.
Different Types of Rental Property Loans
Many rental property investors think there is only one type of loan available to purchase a rental property, but the truth is there are several types of loans available. Depending upon what point in the purchase, remodeling, or consolidating process a rental property owner may be at, there are loans which can accommodate a broader range of conditions, such as:
- Bridge Loan – Working capital to get from one stage of construction to the next stage.
- Construction Loan – Funds to build or remodel a rental property that is paid off with a long-term loan.
- Equity Financing – Borrowing funds using equity already present in rental property.
- FHA and HUD Loans – Lower interest rates for senior living rental properties.
- SBA 7(a) and SBA 504 Loans – US Government-backed loan guarantee programs that reduce lender risk.
How to Finance Multiple Rental Properties
Most rental property owners and investors have an interest in more than one rental property. Over time, as equity builds in property, it’s possible to leverage that equity into ownership in additional rental properties. It only makes sense and it keeps the financing costs of newly-acquired properties more in line with the costs of existing rental properties. Loan consolidation can help keep costs down while allowing the rental property’s asset value to work for investors, rather than just exist on a balance sheet or financial statement.
Rental Property Real Estate Loans Made Easier
Experienced and knowledgeable real estate investors know there are two ways to go about securing a loan for a rental property purchase. They can run around to the banks, investment offices, and other loan sources filing our paperwork until they turn blue in the face or they can go to reliable resource that handles all the details, searches for the best lender, and offers the best loan terms and conditions. The most reliable resource is a skilled business lending organization that handles real estate investment property loans over and over again for many borrowers and property owners. Experience and trust are what matter when it comes to large financial transactions and a commercial lending source is going to save time, money, and frustration.
1) US News and World Report – April 23, 2019 – How to Get a Mortgage For a Rental Property – Rebecca Lake