Permanent Financing for Long-Term Rentals and Vacation Rentals
A rental property loan is a first lien mortgage loan secured by a single-family residential property (1 to 4 units), or SFR, that is occupied by a tenant rather than used as a primary residence. To qualify, the property must be rent-ready. Typically, the tenant is long-term, but rental property loans also can be used for short-term rentals, such as vacation rentals. Rental property loans sometimes also are referred to as investment property loans, non-QM loans, or investor DSCR loans. For the purposes of this post, we are going to focus on buy and hold single-family properties, though it is important to note that an investment property loan can also refer to loans for a fix and flip or commercial property. Let's take a closer look at:
This depends on the type of investment property. For SFR rental properties, it depends on your circumstances. If you have strong personal income, good credit, substantial cash reserves, only plan to own one or two rentals, an agency loan might be the right path for you. If you have good credit, an established track record and you're not looking to grow your portfolio but rather optimize your financing, a bank might be the right choice for you. If you are self-employed and/or looking to grow a portfolio of rental properties, then an alternative lender, such as Visio, might be your best choice.
The difficulty of obtaining an investment loan depends on the type of loan. Agency loans are going to have more involved requirements than an alternative lender. You should plan on 45-60 days to get a rental property loan. Typically bank loans are the most difficult to obtain followed by agency loans. You should find alternative lenders, such as Visio, the easiest to deal with on your rental loans.
An 80% LTV is considered the best-case scenario for rental property financing, but the more you can put down the better to lower your interest rates and monthly payments.
Most investors have a credit score of 700 or greater. You will find alternative lenders that will consider financing investors with FICO scores of 620 or greater.
Interest rates and fees for rental property loans are higher than for owner-occupier mortgages. The difference depends on a variety of factors but generally ranges from 100 bps to 400 bps. See our Guide to Investment Property Mortgage Rates for more details.
Typically to qualify for a rental loan, the property must be rent-ready without any significant deferred maintenance. Rental loans also typically have long terms of five, ten, 15, 25, or 30 years. Qualifying for a renal loan typically requires proving up either personal income or rental income to support repayment of the loan. Hard money loans typically have terms of 24 months or less and often provide some financing for property improvements. Hard money loans often require larger down payments than rental loans, but do not require personal income or rental income to support repayment. Hard money loans typically are significantly more expensive than rental loans and can be closed in 30 days or less.
Investment Property Loan Nuances
Investors typically turn to alternative lenders like Visio Lending for a few reasons. The first situation is if they are self-employed, including owning their own business. Another reason would be that they already own too many properties to qualify for another conventional loan. Finally, and importantly, they may turn to an alternative lender because they want to own their investment properties in a legal entity to protect their other assets. That is not allowed with conventional loans. Here are some of the key nuances of financing an investment property.
Traditionally, for rental properties, appraisers fill out a 1007 report on comparable rents for long-term leases; think a year or more. Appraisers primarily appraise homes for owner-occupiers. As an alternative lender, Visio considers any actual rent performance available on the property and then augments that information with comparable data from a variety of data sources. Unlike a licensed appraiser, Visio is not limited in the information it can use to establish an appropriate rent estimate. Insurance on a rental property is quite different from your personal home. Even many insurance agents who don’t regularly deal with rental properties don’t understand the nuances. Visio has a dedicated team that can help you properly insure your rental property investment and protect you against some of the not-so-obvious risks you may encounter as a real estate investor.
Insurance on a rental property is quite different from your personal home. Even many insurance agents who don’t regularly deal with rental properties don’t understand the nuances. Visio has a dedicated team that can help you properly insure your rental property investment and protect you against some of the not-so-obvious risks you may encounter as a real estate investor.
Many owners of rental properties also engage in fixing and flipping properties. If that’s you, you might think twice about financing both your rentals and your flips with the same lender. Flips are subject to much greater market risk than rentals. Even the best flippers have deals that go sideways or the wrong way. Many lenders include cross-default provisions in their loan documents that provide that if you default on one loan it also counts as a default on all of your other loans. You don’t want to have a bad flip deal trigger a default on your rental properties.