What Every Investor Needs to Know about Loans for Rental Property

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.

 

Conventional Lenders

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.

Pros

  • They have the lowest interest rates.

Cons

  • 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.

  1. 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.
  2. 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.
  3. 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.

Pros

  • Low interest rates: similar to conventional loans
  • You can use your LLC as the owner

Cons

  • 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.

 

Non-QM Lenders

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.

Pros

  • 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.

Cons

  • 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.

 

Non-QM Lenders:

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:

 

Portfolio Lenders

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.

Pros

  • 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.

Cons

  • 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:

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: gerald.collins@financeofamerica.com). 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.

 

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Comments

  1. jos martin says

    I’ve heard a lot of real estate speakers and you are at the top. The info from this post has changed my life.{for the better}
    Thank u so much

  2. Hi Phil, Thanks for your insightful video. I am looking for investment funding for a community development project. I will be selling apartment units. The proposed projection for development is $300k. I have good credit a business account of over 14 years but no money is currently in it and a small savings and land I would not mind using as leverage. However I would like to obtain a loan based on the project estimated revenue. Can you offer any advice on which way is up?
    Thank you kindly

    • Phil Pustejovsky says

      Almost every lender is going to require a down payment from you. If you borrowed against your other real estate holdings, that may suffice for a down payment.

  3. Thank you for an insightful video. Can I qualify for those loans as an foreigner.

    • Phil Pustejovsky says

      I don’t know but if you do enough research on the different lending options that exist out there, you’ll probably find a few that can help you. I haven’t taken the time to research what is available for non-US citizens.

    • Yes, you can get a foreign national loan in the US. But you have to have an ITIN (for tax purposes).

      I got three loans as a foreign national and did last year my refinance of all of my properties as well. So go for it!

    • Steve Walczak says

      https://www.foacommercial.com/single-rental-loans:

      Foreign Nationals allowed (60% LTV max, eligible countries only)
      Interest-only payments
      30-year property loan terms
      Minimum 660 FICO

  4. Phil I bought a property subject to under my LLC but have not pay the $800 for 3 years. Is this going to be a problem with me if I where to sell the property. I am selling house. If you know any student. Let me know

    advice

    • Phil Pustejovsky says

      Go pay the $800 per year LLC fee to catch it up first. You won’t be able to sell it until your LLC is in good standing

  5. Phil – You are correct on conventional that you cannot buy in your LLC, but they now allow you to transfer it into your LLC (see Fannie Mae servicing guidelines below.) I am still researching the title insurance, property insurance, and Deed recording barriers that you mentioned.

    Fannie Mae Servicing Guidelines: D1-4.1-02: Allowable Exemptions Due to the Type of Transfer (11/08/2017)
    “Unless the previous borrower requests a release of liability, the servicer must process the following exempt transactions without reviewing or approving the terms of the transfer:…
    “A transfer of the property (or, if the borrower is an inter vivos revocable trust, a transfer of a beneficial interest in the trust) to”…
    “a limited liability company (LLC), provided that
    • the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).
    Note: The servicer must notify the borrower that a property transferred to an LLC must be transferred back to a natural person prior to any subsequent refinance application in order to meet Fannie Mae’s Selling Guide underwriting requirements.”

    • Phil Pustejovsky says

      You reminded me of another problem; it has to be transferred back into the natural person’s name to do another refinance just like it.

  6. Thanks Phil.. I appreciate you.
    I am trying to buy my first rental property as an investor.

  7. Unfortunately in Canada we can’t get loans for terms of more than 5 years (even if amortization is 30 years) 🙂 So you can count on a fixed rate for 5 years, but it can be a crap shoot after that. We just bought our first rental property. What we got: 5 year term, 30 yr amortization, bought in personal name, 1.85 interest calculated twice per year, adjustable. I was surprised at how “tentative” our lenders were (even though we could have paid for the property in cash). What I’m wondering, is should we simply increase payment schedule to increase our equity?

    • Phil Pustejovsky says

      Sorry, but I can’t help you with Canadian rental property loans. In the US, our rates can stay fixed for 30 years, which makes leverage so wise on rental property. With your 5 year interest adjustment, it changes the equation. You may have to have a lower LTV (and therefore higher equity position) if you are going to borrow against rental property in Canada.

  8. Roger walker says

    If I own my property why would I mortgage it.

  9. Keith Chatting says

    Phil: I still do not understand why having rental property free and clear is not preferred. in my mind, owning the property outright presents many options. The renting minus operating expenses provides more net cash flow and profit. If cash is needed, then you can borrow against it to make more investments.

  10. Robert Cruz says

    Hey I think I understood I should buy my one family house 1st to get the 1st buyer options then get Equity from it to buy a rental property. Is that correct? I’m looking to buy for the first time & don’t know which way to start or go. Any input would be Appreciated..
    Thanks

    • Phil Pustejovsky says

      You can start with any of the lending options, even if it is your first deal. If you can successfully qualify for Conventional, then go the Local Bank / Credit Union route.

  11. I want to join your apprenticeship how do I sign up

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