Wednesday, June 15, 2022

What Kind Of Loan For Rental Property

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First: Whats An Llc And Do I Need One

Qualifying for a Mortgage on Rental Property

Many real estate investors buy and own their rental properties under a limited liability company or LLC. The idea is simple: it separates the legal liability between your personal assets and your companys assets .

So, if your tenants pit bull attacks Little Bobby down the street, and Bobbys parents get lawsuit-happy and sue you, the most you could lose is the rental property, not your own house, car, engagement ring, and firstborn child.

As for whether you need one this is the point where we tell you to talk to an attorney. But I will make a few firm statements on the subject:

1. LLCs only work if you keep your personal and company finances completely separate. No commingling of funds, ever. If you ever pay for a personal expense from your business account, you open the door for lawyers to pierce the corporate veil and get their grubby paws on your personal assets.

2. We have a free masterclass all about Asset Protection for Landlords, co-hosted with asset protection attorney Sayge Grubbs, Esq. Watch it for a great overview of what you need to know as a landlord.

3. All of our FIRE from Real Estate students get a free 45-minute strategy session with Sayge Grubbs to work out their own personal asset protection plan for their properties. Just sayin.

Funding Options For Rental Property Loans

Like mortgages designed for the purchase of owner-occupied residences, you have more than one option when youre shopping for the perfect investment property loan. This is true whether youre taking out a loan for a new rental property or are refinancing an existing investment property loan.;

Below are three types of loans for non-owner-occupied real estate loans to consider.;

Can You Get A Loan For A Rental Property

It is possible to get a loan for a rental property. Approval depends on your credit, income, down payment amount, and the type of mortgage you are applying for, among other factors.;

The risk for the lender is usually higher for a mortgage on a rental property than a primary residence where the borrower lives. Because of this, the qualifications for a mortgage loan can be more stringent.;

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About Hard Money Loans

You can obtain funding through hard money loans. Rental property loans that are built specifically for property investors who are in it to make money by becoming landlords or flipping homes are becoming more popular as more investors realize that banks dont offer the agility needed during the funding process. Eager investors looking to get deals closed without jumping over hurdles are finding that rental-focused loans offer a more streamlined way to obtain funding.

A lot of the restrictions that go along with other funding avenues are erased from the slate when targeted, goal-focused hard money loans are used. Its really important not to overlook just how significant timing is during the dog-eat-dog process of vying for low-cost rental properties.

In fact, many investors who do multiple deals in a year will only do those deals using hard money because they dont have time for conventional mortgages. Lets run through a short side-by-side comparison of conventional mortgages versus hard money funding from a lender like LendingHome:

Hard Money Rental Property Loans:

The Complete Guide To Investment Property Mortgages In 2021

What Types of Investment Property Loans are Available in ...

If the road to real estate riches were an easy one, everyone would be a millionaire landlord or house-flipper.

Making big money from investment property is rarely as simple as buy low, sell high. It requires careful research, planning, hard work and a dollop of good luck.

But as long as you make real estate investing decisions with your eyes wide open, the financial rewards could surprise and delight you.

In 2019, the average gross return of house flipping purchasing, renovating and quickly reselling homes was 39.9%.

In other words, the average house flipper earned $39,900 for every $100,000 invested.

The average return on rental properties in 2019 was 15%. This means the average buyer of a $500,000 apartment building earned $75,000 in a single year!

By contrast, the average stock market return over the past 50 years was about 8% while the average investors return on mutual funds was between 4-5% over the last 30 years.

In this article:

Before examining the benefits of buying investment property, lets bust two persistent myths:

Myth 1: Buying a primary residence is the same as purchasing an investment property.

Fact: Although many people think of their homes as investments, a home is not an investment property unless you buy it for the express purpose of generating rental income or a profit upon resale.

Myth 2: Home values have always risen, so a primary residence will end up being an investment property if you own it long enough.

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Invest In Landlord Insurance

Protect your new investment: In addition to homeowners insurance, consider purchasing landlord insurance. This type of insurance generally covers property damage, lost rental income, and liability protection in case a tenant or a visitor suffers injury as a result of property maintenance issues.

To lower your costs, investigate whether an insurance provider will let you bundle landlord insurance with a homeowner’s insurance policy.

Look Into Landlord Insurance

When you rent out your property for an extended period of time usually longer than six months youll need to buy a special homeowners insurance policy.

Landlord insurance policies cover physical damage to the property itself and potential liability issues, and they typically cost about 25% more than a standard homeowners insurance policy.

Most landlord policies also cover loss of rental income if you cant rent out the property while its being repaired or rebuilt due to damage from a covered loss.

Find out: How to Conduct a Property History Search Before You Buy

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Rental Property Loan Options

There are plenty of good options available for taking out a rental property loan. Borrowing options range from traditional banks and credit unions to lenders who specialize in making blanket or portfolio loans to real estate investors who own 10 rental properties or more.

These rental property loan options can be used when youre buying your first income property, adding to your rental property portfolio, or refinancing an existing mortgage:

1. Conventional loans

  • Also known as conforming loans
  • Offered by mortgage brokers and traditional lenders such as banks and credit unions
  • Guaranteed by Fannie Mae or Freddie Mac and must meet the government-sponsored enterprise guidelines
  • Lowest interest rates and fees with a good credit score
  • Down payment requirements of between 15% and 25%
  • Up to 10 mortgages, although most lenders have an in-house limit of no more than four

2. FHA multi-unit financing

  • Multi-family loan backed by the Federal Housing Administration
  • Offered by mortgage brokers and traditional lenders
  • Good for new construction, substantial property rehabilitation, and purchases
  • Down payment and credit score requirements lower than with conventional loans
  • Can use existing property rental income to help qualify
  • Must reside in one of the units for one year or more

3. VA multi-unit financing

4. Blanket mortgage loans

5. Portfolio loans

6. Private money loans

7. HELOC and Home Equity Loan

8. Seller financing

Home Equity Loans For Investment Properties

What Every Investor Needs to Know about Loans for Rental Property

Using your home equity is a great financing option for a long-term income property or a flip. Home equity loans for investment properties are a type of debt that allows homeowners to borrow against the equity of their home to use towards buying a second home or an income property. The loan is based on the difference between the homeowners equity and the property√Ęs current market value. Many lenders provide real estate investors with up to 80% of the homes equity value!

Using home equity loans for investment properties has some advantages and disadvantages and the situation will differ depending on the type of loan you go for. The lender will run a credit check and appraisal on your home to determine your creditworthiness. This financing option provides an easy source of cash and obtaining the loan is quite simple. Moreover, interest paid on home equity loans is tax-deductible.

Home equity loans for investment properties are essentially a second mortgage, but they have higher interest rates than the first mortgage. As with any mortgage, if the real estate investor doesnt pay off the loan, the lender gets to repossess the investment property and sell it to satisfy the remaining debt. Plus, if property investors default, lenders get to keep all the money earned on the initial mortgage and the home equity loan.

To learn more about how we help property investors make faster and smarter real estate investment decisions, click here.

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Types Of Loans For Investment Properties In Real Estate

Becoming a real estate investor is a great way to earn passive income. But you will need some money on hand to get started in real estate investing. If you dont have enough cash saved up, taking out loans for investment properties is a great option.

There are actually many types of loans for investment properties. If you choose the wrong type of loan, you can really hinder the success of your real estate investment. So its crucial that a real estate investor understands all of the options available before contacting a mortgage lender.

In this article, we break down the 6 most common types of loans for investment properties to help you, the real estate investor, determine which option works best for your investment.

Refinance After Renovating: Brrrr

The BRRRR method is an acronym for buy, renovate, rent, refinance, rinse and repeat.

When you refinance after renovating a property, you can pull your initial cash back out, to use as the down payment for your next rental property. In this manner, you only really need to save up the first down payment, because you can keep using the same cash over and over to buy new properties.

Except with each property you add to your portfolio, you also add to your monthly income. That helps you snowball your income to put more and more money into each successive deal, helping you expand into larger, more lucrative investment properties.

You can use lenders like LendingOne, Patch of Land, or a hard money lender for the initial purchase and renovation, and then refinance for a long-term mortgage with LendingOne, Visio, or some other long-term rental lender.

I initially built my rental portfolio this way. Its a classic strategy for a reason!

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Whats The Difference Between A Construction Loan And A Renovation Loan

The difference between construction loans and renovation loans lies in the type of project. Construction loans are used for new properties with definitive project plans. Those who use construction loans will also typically transition into a regular mortgage at the end of the construction project. In contrast, renovation loans for investors are used to purchase fixer-uppers or to renovate existing properties. These loans can be used for cosmetic and structural fixes, like insulating a house or upgrading a kitchen.

How Much Investment Property Can You Afford

What Kind Of Loan Do You Need To Buy Rental Property

Qualifying for an investment property mortgage involves proving your ability to comfortably manage the monthly payments. Before you make purchase offers, its wise to apply for a mortgage preapproval. This is the most straightforward way to determine how much investment property you can afford to buy.

Once you have a price range, take some time to research the local rental market online. Your lender will most likely consider 75% of your expected rental income as part of your loan application. This can be done easily if the property was already an investment property and theres a rental history to evaluate. Otherwise, your lender can look at market rents in your area to come up with a reasonable estimation of rental income.

Dont forget to factor in ongoing rental property expenses when figuring out how much you can afford. These may include but arent limited to:

  • Landlord insurance
  • Utilities

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Heloc Alternatives To Consider For Your Rental Property

The more you look at a HELOC loan, the less attractive it may seem due to the rigorous inspection process and high costs. This isnt the end of the world, since there are plenty of other options available to fund your rental property.

Here are some alternative options to consider before going through the application process.

House Hacking Can Be An Alternative If You Can’t Afford A Rental Property

If you cant qualify for an investment property mortgage, or dont have an adequate down payment, you might want to consider a house hacking investment. This can be a great way for first-timers with flexible living situations to dip their toes into the rental property investing world.

Heres the basic idea: A house hack involves buying a two- to four-unit residential property, living in one of the units, and renting out the others.

There are some big advantages to this investment strategy, mainly involving the fact that the property can be classified as your primary residence. You can obtain a mortgage with a lower down payment and favorable interest rate, for example. FHA mortgages on primary residences can be obtained with just 3.5% down. You can also get the lower owner-occupied property tax rates that exist in many areas. And when you eventually sell the property, you may be able to exclude any capital gains from income tax.

In fact, my first real estate investment was a house hack. Shortly after we got married, my wife and I bought a duplex and lived in one side while renting out the other. The rental income covered most of the mortgage payment, so we were able to live extremely cheaply while building equity in a more valuable property than we would have purchased on our own.

To be clear, there are pros and cons to house hacking, so be sure to read our guide to house hacking to determine if it might be a good way for you to start your rental property investing journey.

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What Is A Rental Property

A rental property is real estate purchased by an investor and rented out to tenants. Rental properties fall under two categories:

  • Residential: These include single-family homes, apartments, and condos
  • Commercial: These include office buildings, x, and any other properties zoned for business purposes

Well focus on residential rental properties. As the landlord of a residential rental property, you can either manage the property yourself or hire a company to handle matters like communicating with renters and ordering repairs. When youre ready to sell the home later, you keep any profits from the sale.

If youre in the market to purchase a property, Credible can help you easily compare mortgage rates from all of our partner lenders it only takes a few minutes, and it wont affect your credit score.

Credible makes getting a mortgage easy

  • Instant streamlined pre-approval: It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter, without affecting your credit.
  • We keep your data private: Compare rates from multiple lenders without your data being sold or getting spammed.
  • A modern approach to mortgages: Complete your mortgage online with bank integrations and automatic updates. Talk to a loan officer only if you want to.

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Buying Rental Property With A Conventional Mortgage

4 Rental Property Financing Options

You have to be better-qualified to finance a rental than you do to buy your own home. That means higher credit scores, more cash reserves in the bank, and lower debt-to-income ratios.

You might also need to have sufficient existing income to comfortably afford both mortgage payments. Until you can prove that youre an experienced landlord, lenders are likely to ignore all the potential rental income from the rental property youre buying.

Comparing home loans: Which one is best for me?

When they do count the rental income, lenders typically deduct a 25 percent vacancy factor.

There may be a workaround for this. However, its one you should adopt with caution. Some non-mainstream private lenders may be willing to lend on different terms. But theyre likely to charge a considerably higher mortgage rate.

Other challenges

Your investment property mortgage rates are likely to be a little higher than the ones youd pay when youre buying a home for your own occupation. Expect to pay at least .75 percent more. If youd qualify for a 4 percent rate for a primary residence, that means youd be offered about 4.75 percent to finance a rental.

Youve already read about the rule that says you need savings in a bank or investment account of at least 2 percent of the balance on your mortgage on the rental home. This is to make sure youre not going to miss a mortgage payment if you have a temporary vacancy or non-paying tenant.

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Are You Financially Ready To Invest At All

Before you even consider buying a rental property, its important to do a quick financial health checkup. In a nutshell, there are two basic financial things you should do before you become a rental property owner:

  • Pay off high-interest debt: The average credit cards interest rate is more than 17%. Its possible to earn returns in this ballpark on rental real estate, but it isnt exactly common, especially for new investors. The point is that its silly to invest money in the hopes of earning a 10%15% annualized return , while simultaneously paying a higher rate to borrow money. If you have high-interest credit card debt, you should aim to pay it off or at the very least get a 0% APR balance transfer before you buy a rental property.
  • Establish an emergency fund: What good is an investment if youll have to sell it if you face any unexpected expenses? Before you start investing in real estate or anything else, its a good idea to build up a bit of an emergency fund to help you deal with unexpected expenses or financial hardships. Most financial planners suggest that you should aim to keep six months worth of expenses in an easily accessible place. This is certainly a good goal to aim for, but you dont necessarily need to get there before you start to invest.

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