Overcoming Common Rental Property Financing Challenges: A Broker’s Perspective

Rental properties continue to be one of the most popular strategies for investors looking to build a strong, wealth-building portfolio with real estate. Besides offering consistent monthly income, these assets offer great tax incentives and other benefits like appreciation and refinancing opportunities. However, investors often run into challenges with securing financing when they are looking to add rental properties to their portfolios. As a broker, your role is to guide your clients through these difficulties by offering them your insights and creative solutions to their problems.

Read on as we explore some of the most common challenges investors face when financing rental properties, and how brokers can help guide their clients through these challenges.

Understanding the Unique Financing Landscape for Rental Properties

While conventional mortgage loans are typically used for properties that borrowers are planning to live in, rental property loans differ in that borrowers' plan to generate income with the home. This often leads to more restrictions when working with a traditional lender to secure financing, but that does not mean borrowers don’t have options. Aside from conventional mortgages, borrowers can work with private lenders who offer options such as:

• DSCR Loans: Which use the Debt-Service Coverage Ratio to qualify properties for long-term financing
• Hard Money Loans: Which are secured by the property itself as collateral
• Bridge Loans: Short-term financing solutions designed for quick acquisitions
• Portfolio Loans: That consolidate multiple properties into a single monthly payment to reduce financing costs

Brokers can guide their clients by helping them understand the differences between each loan option and assist them in choosing a loan that’s right for their circumstances.

Borrower Qualification Issues

One of the most common issues investors run into is struggling to qualify for a loan due to their personal credit or income situation. Investors often have unconventional income sources which do not provide W-2s, such as relying on revenue from their existing assets, and this can make it difficult to qualify for financing. Brokers can help their clients work around these issues by structuring loan applications in a way that highlights these sources of income, or offering advice to strengthen their clients' borrowing profiles. Alternatively, it may be worth looking into working with private lenders, as they will typically be more interested in the investment potential of a property than the borrower’s personal finances.

High Down Payment and Reserve Requirements

Another common hurdle investors encounter is the high down payment and cash reserves needed to secure a loan. Lenders have these requirements mainly because it reduces risk on their part, and it also shows them that the borrower is serious about the investment. There are still ways brokers can help their clients deal with these requirements, however. For example, you can recommend using a HELOC or a cash-out refinance on an existing property to help generate the capital. You can also advise them to partner with other investors in a joint venture. It may even come down to exploring several financing programs and lending options to find one that best fits the needs of the specific client.

Rising Interest Rates and Market Uncertainty

The higher interest rates affecting the real estate market have caused some uncertainty for investors and may make them more hesitant to acquire new properties. As a broker, you can help your clients navigate these challenges by shopping around for a more attractive rate or negotiating with your established lenders to secure better terms. You can look into alternative financing options as well, such as adjustable-rate mortgages (ARMs). Also, while timing the market can be difficult, real estate does tend to follow a seasonal cycle and suggesting that your clients invest in a property at the right time can help offset the cost of higher interest rates.

Property Cash Flow and DSCR Requirements

Debt-Service Coverage Ratio is an important aspect of rental properties, since it measures how well the income provided from rents covers monthly expenses. It’s a straightforward way for lenders to understand how profitable a rental investment is and can be used to qualify these properties for financing. Brokers can assist their client in securing DSCR loans by helping them conduct due diligence and select cash-flow-positive properties to add to their portfolios. For properties that the investor already owns, it’s possible to improve the DSCR ratio though improvements that increase rent, or by strategically reducing overall expenses.

Lending Restriction on Multiple Properties

Conventional mortgage loans offer attractive interest rates, but they also come with many restrictions, including how many properties a borrower can finance using these loans. This can hinder an investor's ability to expand their real estate portfolios, but it’s also where brokers can step in to provide solutions. You should look at adding a variety of loan solutions to the offerings you have for your clients, including portfolio loans for high-volume investors, DSCR loans from private lenders, and commercial loans for large, multi-use properties. Having a variety of financing options positions you as a resourceful partner to your clients, making you a one-stop-shop for investors looking to solve any kind of financing dilemma.

The Broker’s Perspective: Become a Trusted Advisor

A broker’s role isn’t just to provide financing to investors. Building strong relationships with your clients requires you to go above and beyond to become a trusted resource in the real estate space. Staying informed on the markets your clients are invested in is one way to do this, since you can offer better insights and help them make smarter investment decisions. You can leverage technology such as online listing platforms and research tools to help you become better-informed on market trends, and find good areas and properties to invest in.

Building relationships with lenders is the other important piece of the puzzle. Maintaining good working relationships with lenders can give you access to streamlined application processes, which helps your clients close deals faster. Staying up to date on the various financing programs available also helps you provide the right solutions to fit your clients’ needs.

RCN Capital

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 investments. If you are a broker or wholesale partner looking to provide financing for a real estate project, RCN Capital has competitive loan options available.