Discover the 4 main sources of investor loans for rental property; Conventional, Local Banks / Credit Unions, Non QM Lenders and Portfolio Lenders. In this training, you'll learn which ones to use, when, as well as tips and tricks on how to maximize your experience with each. This is a MUST watch for any real estate investor who owns (or plans to own) residential rental property.
I’ve never been a fan of owning rental property free and clear. Instead, I believe every rental property needs to have a loan against it. In my video Should You Pay Off Bank Loans on Investment Property, I prove why this is such a bad idea. I go so far as to say that it's financially irresponsible to not have a loan against rental property, so long as it's a long-term, reasonably low fixed rate interest loan.
So where do these loans come from? Where do you get a 30-year fixed rate loan with a reasonable interest rate against rental property as an investor in residential real estate? There are four main lenders that provide the best loans for residential rental property. I'm going to share with you the pros and cons of each so that you can find the best fit for your next rental property loan.
These are loans that are sold in the secondary mortgage market to Fannie Mae and Freddie Mac. This is most mortgages in America and just about every bank and mortgage company that exists originates conventional loans. These loans are primarily for owner occupants. Can investors get conventional loans? Well, yes, because Fannie and Freddie will buy non-owner-occupied loans if they're single-family up to a fourplex.
- They have the lowest interest rates.
- They have the highest requirements. You must verify the income and have a perfect loan application and for many investors this is difficult to pull off.
- They will not allow you to own rental property in an LLC:.Which means you must buy the property in your personal name.
To get around this some investors have made the purchase in their personal name and then quitclaim it into their LLC. Well, there are 3 major problems with this otherwise brilliant strategy.
- When you move the property into the LLC, you void your title policy. If you do have a title problem down the road, this could be an issue because your policy has just been voided and you paid good money for it when you bought that property.
- Many states charge a recording tax at the same amount as the mortgage. On my first vacation rental I did a conventional loan as a second home loan and when I moved into an LLC, I was charged recording taxes for recording that quitclaim deed. That was an extra $5,000.
- Problems with your insurance. Remember you're buying your own property subject-to if you transfer into an LLC after closing. So, sometimes it can be a hassle with your insurance company, and your insurance rates go up.
All that said, I am not a fan of investors getting a conventional loan on a rental property. And here's why. There's a better option that gives you the same benefits of conventional, which leads me to lending option number two.
Credit Unions/ Local Lenders
If you can qualify for a conventional loan, a better option is local banks and credit unions.
- Low interest rates. similar to conventional loans
- You can use your LLC as the owner.
- High requirements. Similar to conventional loans
This makes local banks a great option for rental property owners. I haven’t provided a list of local banks or credit unions because their requirements are always changing. What one local bank had an appetite for at one point in time, they no longer do. But if you look great on paper as a rental property owner, this is the one to go to for your loan. You get the benefits of conventional while you get to own it in an LLC.
What if you don't look perfect on paper like most real estate investors? Maybe you have decent credit, but you're not able to prove the income the way a conventional bank wants to see it. Where do you go? To a Non-QM lender (QM stands for Qualified Mortgage), which is where many investors operate.
- They have more flexible requirements. For example, maybe you can show income from your bank statements, but not from your tax returns because of deductions from the projects you've been working on. Non-QM can go all the way down to almost stated income.
- You can own the property in your LLC.
- They'll do 30-year fixed rate loans. One of the things I love about non-QM is the range to which they'll work. I did a deal recently where they were willing to do a 40-year loan, first 10 years were interest only then after that it was 30-year amortized.
- The interest rates are a bit higher. There’s a rate bump of almost a point; if credit unions are 1% to 1.5% higher than the prevailing rate, then non-QM are almost a point higher than local bank loans.
- You must go through a mortgage broker. These are wholesale lenders who work through mortgage brokers rather than in-house staff who handle loan origination.
A lot of mortgage brokers that are skilled discover that they can make just as much money on convention as non-QM loans and conventional is much easier for them because non-QM lenders do ask for a lot of documentation. One of the main problems investors run into is finding mortgage brokers who are willing to work with them and that have experience with non-QM lenders. They do work harder for the same pay, so you need to build a relationship with a mortgage broker that is willing and has experience with it.
When you interview a mortgage broker, mention names like Angel Oak, Citadel, and New Rez. Ask them if they have done a deal with Angel Oak recently or another non-QM lender. How did it go? What were the terms? What are the details? Working with a mortgage broker presents a double challenge. You have to find one that works with these groups but also likes to work with these groups.
While you'll need to connect with a Mortgage Broker in order to obtain a loan from a Non-QM lender, here are the leaders in this space:
- Angel Oak Mortgage
- Citadel Servicing Corp
- Caliber Home Loans
- Athas Capital Group
- LendSure Mortgage
What if your property is a productive rental property, but you on paper somehow look terrible? You need a long- term lender that's focused not on you but is focused on the property. Where do you go? Introducing portfolio lenders.
- They'll do 30-year fixed rate loans. Not only do they provide hard money loans, but they also provide permanent long-term 30-year fixed rate loans on rental property.
- They focus on the property far more than you as the borrower. In fact, some of them, all they look up is your credit to make sure you're at least 640. Then from there, all they focus on is the property.
- No limit on the number of properties they will lend on. If you have a lot of rental property loans, at some point they won't lend on you. Non-QM may be a little more flexible, but they might stop at 12 loans. Whereas portfolio lenders like the bigger portfolios. They want to lend on 20, 30, 50, even 80 properties.
As a test for my students, I did a deal on a vacation rental with a portfolio lender and they focused completely on the income of the property. They asked me to get statements for Airbnb and VRBO and they could care less about me personally, even though I look perfect on paper. So, portfolio lenders are amazing for investors right now.
- The interest rate is higher. So again, scaling up, this is about another point higher than a Non-QM loan.
If your property cash flows very well, but you don't look good on paper, this lender is a good option for you.
Portfolio lenders are the most investor friendly options for originating long term fixed rate loans on rental property. The first on the list is my favorite:
Finance of America Commercial: My contact at FOA Commercial is Gerry Collins (Phone: 224-221-2137 Email: firstname.lastname@example.org). If you speak with him, you can name drop me, if you would like.
Others in this vertical include:
Down Payment Requirements
Almost unanimously, you will be required to put 20% down for a purchase. If you're doing a cash out refinance, they'll usually require 25% equity or a 75% LTV loan. Deals that require no money down are typically done by structuring them with the homeowner, you take over their loan subject-to or do owner financing. But rarely are those the deals that are long-term. Usually when you structure subject-to or owner financing, the seller will only allow it for a couple of years. So, if you're looking to do long-term deals, you need to look at these four lenders. Another strategy would be to get a hard money loan, or do a short-term deal. Then once you get the property renovated and stabilized, you do a cash out refinance with one of these four loans.
It is a mistake to think you can become a rental property investor and acquire all these incredible cash flowing properties with no money down. That's not really how it works. Instead, we recommend using creative no money down techniques to produce big chunks of cash, and then take that cash and get one of these four loans to buy the right rental properties that are cash flowing well in the right locations. You're not going to get around this down payment requirement. What you're going to do is find a way to get the money for the down payment requirement, either in the form of cash or in the form of equity when you do a cash out refinance.