The Broker’s Guide to Financing Long-Term Rental Properties

Long-term rental properties are a smart addition to any portfolio, providing investors with consistent income and an easy entryway into the world of real estate investing. These properties also provide additional benefits like long-term appreciation and equity growth which help investors build wealth in the long-term. As one of the most popular asset classes for investors, brokers play a key role in helping their clients find success by offering insights on acquisition strategy and matching them with the right financing options. It’s also important that brokers are well versed in the rental financing space to ensure their clients achieve the most favorable outcomes.

Read on as we cover the ins-and-outs of rental properties and their financing options, as well as how brokers can help their clients make the most of this lucrative investment class.

Understanding Long-Term Rental Property Investments

Let’s start by breaking down what makes long-term rentals such a great investment. Aside from the steady cash flow these properties provide, they offer advantages like long-term appreciation because they are one of the most popular forms of real estate for both investors and traditional homebuyers. This allows investors to build equity fairly quickly, which can be taken out with a refinance loan and utilized to expand their portfolios even further. Single family homes also have lower tenant turnover when compared to multifamily properties, which makes them easy to manage even for beginner investors. This also makes them a prime candidate for rental property management, giving investors a path to passive income.

If you are a broker, mastering the rental property asset class allows you to structure better deals for your clients, and grow your business. Understanding the different financing options available also helps you match your clients with a loan that fits their projects’ specific needs.

Loan Options for Long-Term Rental Properties

So, what kind of loan options are available for financing long-term rentals?

• Conventional loans: Traditional mortgages can be used to acquire real estate property, and certain programs like FHA loans can be attractive to investors with strong credit and W-2 income. Just keep in mind that these loans often have limits on the number of properties which can be financed, and they also have stringent criteria on the types of properties that qualify for financing.

• DSCR loans: Private lenders offer financing for rental real estate properties which are called Debt-Service Coverage Ratio (DSCR) loans. Qualifying for this type of financing is based on the ratio of income the property provides when compared to monthly debt expenses, rather than the borrower's personal financial status. This means borrowers with less than stellar credit or unconventional income can still qualify for financing.

• Portfolio loans: Also called Blanket loans, this is a way for investors with multiple properties to consolidate their real estate portfolio under one financing structure. This simplifies and often reduces monthly payments because less loan fees are incurred. These loans also have more flexible underwriting criteria, which is a benefit for experienced investors.

How to Match Investors with the Right Loan Type

There are a few key factors to consider when deciding which type of financing is the right fit for your clients. Start by considering their overall experience level; first-time investors may be better suited to a conventional mortgage while investors with real estate experience may appreciate the flexibility of private loans. The number of properties an investor owns, and their overall investment goals may also affect financing options. For example, investors looking to reduce financing costs will prefer the low-interest rates FHA loans provide, while investors with a large portfolio can benefit from using a blanket loan. Just remember that while conventional loans do offer attractive interest rates, they are typically not as customizable as private lending options, which also offer other advantages like faster approval times and less stringent lending criteria.

Common Pitfalls Brokers Should Avoid

Both brokers and their clients can run into common mistakes which complicate their real estate deals. Borrowers need to be careful that the properties they choose provide ample cash flow to cover their debt service and still offer a solid return. It’s important that brokers take the time to educate their clients on the terms of their loan, including repayment structure, fees, and other aspects like prepayment penalties. Failing to prepare for market shifts, or not having a contingency in case problems do occur, can also be a fatal mistake that ruins the profitability of an investment. You should recommend that clients perform their due diligence and plan accordingly to reduce the risk of these pitfalls and help ensure they have a successful deal.

Pro Tips for Brokers to Close More Rental Property Loans

In order to close more loans and grow their businesses, brokers should strive to position themselves as experts in the rental property space. This means staying up to date on market trends as well as loan product changes, and communicating these updates to your clients. Be sure to utilize technology platforms like ATTOM Data and REiDEALMASTER to gain access to up-to-date information on different markets and property types.

Establishing partnerships with private lenders can also be beneficial as this gives you access to things like faster approval timelines and more favorable loan terms. Similarly, you should establish working relationships with past clients to increase the chance of them returning to you with more business or referring new investors to you. You can do this by building an email list and staying in regular contact with past clients, offering them updates on loan products, market changes, and deal opportunities.

RCN Capital

The best way to save on a real estate investment is to obtain financing from a real lender that can provide you with 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. If you are looking to finance a real estate project, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.