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If you’re someone who’s looking to build long-term wealth, rental properties continue to be one of the smartest investments you can make. Rentals make for such good investments because on top of the consistent income they provide each month, they can also grow in value over time through appreciation. If you are interested in adding a rental property to your portfolio, first you’ll want to take a look at all the different ways you can finance your investment. It helps to understand your options so that you can choose the one that best fits your deal scenario. Continue reading as we cover everything you need to know about the types of loans available for rental property investments.
Types of Loans Suitable for Rental Properties
To start, let’s go over some of the basics for each of the financing options available for rental properties:
- Traditional Mortgages: These include bank loans such as 15 and 30-year mortgages, as well as federal loan programs like FHA loans. While investment properties may not qualify for these government programs, a traditional loan can still be a great option for financing single family and smaller multifamily properties. Traditional mortgages come with very competitive interest rates and generally high leverage ratios as well, meaning you can get by with a smaller down payment.
- Commercial Loans: These types of loans are better suited to financing large multifamily homes and mixed use properties, since traditional mortgages generally don’t cover properties with 5 or more rental units. These loans also differ from more traditional mortgages since they tend to cap out at 20 year amortization periods, and often come with higher interest rates. You can also expect a minimum down payment of 20% for one of these loans, as there is inherently more risk involved with a larger, high-value property.
- Private Lending: Private loans are the final option we want to cover. These are offered by private companies that operate in the real estate space, and can be a viable option for many deal scenarios. The benefit of going with a private loan is that lenders are very flexible when it comes to loan terms, and they can even be tailored your specific deal. Your personal credit is also less of a factor when applying, since lenders will be more interested in the property being financed and whether it is a financially sound investment.
Factors to Consider When Choosing a Loan
It’s important to compare all the aspects of the different financing programs you have available to you. Besides the basic terms we discussed, such as interest rates, loan period, and down payment requirements, you will also want to take a look at the loan’s finer details. For example, when it comes to the type of property being financed, traditional lenders (such as banks or credit unions) may not be willing to lend on homes that are in rough shape as they may deem them too risky. Before applying, you will also want to take a look at the lender’s prepayment penalties, and you may also want to consider adjustable-rate options.
You should understand that certain loan programs will have more stringent requirements for the borrower’s credit score and personal income. Depending on the property itself and your personal situation, there may be certain programs better suited to your investment. You should consider working with a private lender if you are running into any issues here, as their less stringent requirements and general flexibility can be the perfect solution for your scenario.
Assessing Investor Qualifications
Every lender you work with will have certain qualifications that you or the property being financed will need to meet in order to be approved for a loan. For traditional mortgages, there’s typically a minimum credit requirement in order to be considered for approval. When it comes to private loans, however, the property in question is more important. Lenders will be looking at the income potential of the property and comparing it against its’ debt to determine your ability to repay the loan. This is commonly referred to as the Debt Service Coverage Ratio for the property, and lenders may have minimums on this ratio to qualify for financing. It’s also important to note that commercial loans often have credit requirements as well as income requirements due to the higher-risk nature of the loan.
Whichever option you choose for financing your next investment, its important to do your due diligence by comparing each of the offers you receive, and researching the reputation of each lender. A quality lender will have a proven track record of delivering financing in the real estate space, and will be transparent and honest when it comes to their loan programs. By taking the time to make an informed decision, you can ensure that your deal is successful and profitable.
RCN Capital
The easiest way to save on rental property financing is to find a trusted lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Are you looking to purchase or refinance a long-term rental property? Connect with us today.