September 17, 2018

Wondering where you’ll find a rental property loan to fund your next deal?

Most new real estate investors are unaware of all the options available to them for rental property financing. As they buy more properties and discover new forms of financing, they often find themselves asking “Why didn’t I know about this option before?”

After all, leverage – the ability to use other people’s money to finance your investments and assets – is one of the key advantages to real estate investing.

If you’re wondering how the heck you’ll fund your next deal, stress not. Here are five options for financing your next real estate investment, depending on your experience, cash, and credit history.

Conventional Lenders

The first place most new real estate investors look for financing is the same mortgage broker that handled their home loan.

And conventional lenders have their advantages for rental property loans. First, they tend to be less expensive than the alternatives, with relatively low interest rates and lender fees.

Typically, they require a 20-25% down payment, which is no worse than you’ll find anywhere else. Better, in some cases.

But they come with several downsides, too.

To begin with, they’re slow. Investors can expect to wait at least 30 days to settle, and often closer to 45 or 60. Which means that any urgent deals can’t be financed with conventional rental property mortgages.

They’re also stringent on credit history. Conventional lenders base their underwriting largely on you as a borrower, rather than focusing more on the property and the deal (more on this momentarily). If your credit is patchy, conventional loans may not be the right financing for you.

Lastly, conventional lenders report to the credit bureaus. That may not sound like such a bad thing, but it’s only feasible for your first few properties. Conventional lenders will not lend to borrowers with more than three or four mortgages listed on their credit reports.

As a final thought on conventional lenders, investors with little cash can use homeowner mortgages if they’re willing to move into the property. Investors can house hack – buying a multiunit, moving into one unit, renting the other(s) – or they can move into a property for a year, then move out and keep the property as a rental.

All using cheap homeowner mortgage loans with a 3-5% down payment.

Online Landlord Lenders

Over the last decade, online lending firms have risen as worthy competitors to conventional lenders.

Their pricing tends to be slightly higher, both on interest rates and fees, and they may require a higher down payment. Expect to put down 20-25%, possibly more if you’re inexperienced or have poor credit.

But where conventional mortgage lenders focus heavily on your income and credit report, online lenders tend to focus more on the collateral. What’s the property worth? Are you scoring a good deal?

Many online lenders don’t even require income documentation!

Most of these rental property lenders don’t report to the credit bureaus, and won’t turn you away if you have three or four mortgages on your credit report already. Quite the opposite: the more deals you’ve done in the last year, typically the lower the interest rate and points that they quote you.

These lenders have no qualms lending to LLCs or other legal entities, either.

Oh, and they’re faster than conventional lenders. Sometimes dramatically so.

If conventional lenders are the training wheel lenders for new landlords, online investment property lenders strip off the training wheels for a more flexible, sustainable source of rental property loans.

Local Community Banks

Another viable option for landlord loans are local community banks. Often they don’t report to the credit bureaus, and will lend to LLCs and other legal entities.

Pricing and loan-to-value ratios (LTV) vary wildly, so call around to learn more about your local banks’ lending terms.

With that said, I've found that local community banks charge similar pricing as online rental property lenders.

These banks tend to take just as long to settle as conventional lenders, and will probably require income documentation.

Still, because these banks are local and independently operated, each is unique. Investors can often develop a relationship with a local bank, and receive fast funding on rental property loans.

HELOC Against Other Properties

Have some equity in your home? How about equity in other rental properties?

Rather than get a rental property mortgage on your new purchase, you could use a home equity line of credit (HELOC) secured against another property (or several of them).

These are cheaper when you put up your own home as collateral, and lenders will offer a higher LTV than they will against rental properties.

There are two strong advantages to HELOCs as a source of rental property financing. First, they are lightning fast, since they’re a line of credit already approved against a different property as collateral.

Just as important, they are flexible. You can pay them off quickly if you like, then turn around and use them again to buy another rental property. Rinse and repeat.

But how can you pay them off quickly? Where does that money come from?

Private Funding

The holy grail of investment property financing: private funds from friends, family, and acquaintances.

Fees, interest rate, loan terms – all negotiable. And LTV? Not an issue, as you can borrow as much money as people are willing to throw at you.

But therein lies the catch: it’s based on trust, and trust comes from a track record of success. It takes time for you to develop the experience necessary for your friends and family to trust you with their money.

And for you to trust yourself with their money.

If conventional loans are the training wheels of rental property financing, and online lenders and local community banks are standard, sustainable sources of funding, then combining HELOCs with private funding are more elite financing vehicles. It takes time to build equity in other properties for HELOCs. It takes time, experience, networking, and trust to develop a pool of private investors willing to hand you their hard-earned cash.

At the elite level, an ideal way to fund deals is to use HELOCs to quickly purchase new rental properties, then raise private funds to pay off the HELOC balance.

What to Look for in a Rental Property Loan

Unlike short-term hard money loans, interest rates do matter when you’re looking for long-term loans. Look for a balance of speed, flexibility, low-interest rates, low lender fees, and high LTV.

If you have poor credit, you still have options, but even online lenders have minimum credit scores, and will charge more and require high down payments for low-credit borrowers. Work on repairing your credit to see better loan offers.

As a starting place in your search for funding, here’s our comparison chart for rental property loans, listing the pricing and loan terms for several types of lenders. Talk to several lenders to see if they’re a good fit for you, and to confirm personalized loan quotes.

Build relationships with several lenders, and you’ll find lower pricing, lower down payments, and faster settlements.

Remember, you can always refinance rental properties later if your purchase financing proves less than ideal. But if you get it right the first time, you can avoid the second round of closing costs inherent in a refinance.

Happy real estate investing!

Author Bio: G. Brian Davis is a real estate investor, landlord, and co-founder of SparkRental.com, which provides free video courses, webinars, and landlord tools such as a free rental property calculator. He serves as a rental investing expert in his regular columns for publishers like BiggerPockets, RETipster, LendingHome, and more, and gets to spend most of the year traveling overseas, largely due to the flexibility of his rental income.

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