Financing Options for the Rental Property Investor
As a residential real estate investor, you may find many more financing options for your rental property investment than for your primary residence. By understanding various loan types for rental properties, you can choose the one best suited to your investment strategy and financial situation.
1. Conventional Investor Loans
These are conforming loans that follow guidelines by Fannie Mae and Freddie Mac, who purchase and guarantee these rental property investor mortgage loans.
These guidelines establish minimum lending standards for rental property investments, including minimum down payment and credit score requirements, debt-to-income ratios, and more.
2. FHA Multifamily Loan Programs
The Federal Housing Administration backs these investor programs and offers several benefits, including low down payment requirements and flexible credit guidelines. More specifically, borrowers may qualify for an FHA loan with as little as 3% down and/or a credit score of 580 or higher.
An investor must occupy one of the units for the first 12 months in a building with 2–4 units.
3. VA Multifamily Loan Programs
VA loans can finance rental properties for veterans and active-duty military members and their families, as long as one of the units serves as their primary residence. These programs offer favorable loan terms, including a lower interest rate, up to 100% financing, and simplified qualification criteria.
These loans also provide funds for closing, rehabilitation, and other related expenses associated with purchasing or constructing a multifamily property.
4. Portfolio Lenders
A portfolio lender is a bank or financial institution that holds its loan portfolio in-house rather than selling it on the secondary market.
By keeping its loans, the portfolio lender can offer more flexible loan terms and customization options for real estate investors. That’s because they are usually not bound by strict underwriting guidelines or regulations from third-party entities.
5. Private Lenders
A private lender is any entity, including an individual, that offers loans to borrowers. They may have a wider variety of offerings and terms than traditional lenders, tend to be more flexible with loan qualifications, and offer fast approvals.
However, private lenders rarely provide the same consumer protection as federally insured banks and credit unions. So, make sure you understand the loan terms completely before signing any agreement.
6. Home Equity Loans
A home equity loan and a home equity line of credit (HELOC) allow homeowners to borrow money using their home's equity as collateral. A home equity loan provides a lump sum upfront that is repaid in fixed monthly installments with a fixed interest rate.
Conversely, a HELOC provides a revolving line of credit that you can borrow from when needed, similar to a credit card. The funds can be used for down payments or related costs associated with purchasing or rehabbing rental properties.
7. Cash-Out Refinancing
Cash-out refinancing is a method used to fund a rental property by refinancing your current mortgage balance for more than what is owed and receiving the difference in cash. The money could then be used as a down payment or cash purchase of another property.
However, interest rates can affect the viability of a cash-out refinance strategy, as a higher rate (and larger loan balance) could mean that the new mortgage is more expensive than the original.
8. Hard Money Loans
You may use a hard money loan to finance a rental property when traditional financing options are unavailable or do not fit your needs. Hard money lenders typically base their loan approval on the property's value rather than the borrower's creditworthiness or financial situation.
These loans typically require a quick repayment schedule and may have high fees and interest rates, making them ideal for short-term investments, flips, or bridge loans.
9. Seller Financing
When traditional financing options are limited or have high-interest rates, the seller can act as a lender, allowing buyers to purchase the property and pay for it in installments.
For sellers, "carrying the note" can offer an additional revenue stream and a quicker sale. For buyers, it can provide negotiable repayment terms, flexible down payment options, and more manageable financial commitments than traditional lending.
10. Group Investing
Group investing is a popular real estate investment strategy whereby multiple investors pool their resources to finance a rental property purchase. By creating an LLC or partnership, investors can share ownership, risks, and responsibilities associated with owning a rental property.
This approach can offer various advantages, including increased purchasing power to buy larger or multiple properties, creating diversified investment portfolios, and streamlining property management processes.
Closing Thoughts
Financing options for rental properties differ from those for primary residences. Choosing the right strategy can make all the difference, and selecting the right one depends on your goals and unique circumstances. Remember to take the time to evaluate the options and make an informed decision that aligns with your needs.
One essential aspect of protecting your rental property investment is getting the right insurance coverage. With adequate insurance, you can safeguard your property and minimize the financial impact of unforeseen events. It's crucial to take the next step in protecting your investment by obtaining the correct insurance coverage.
