How to finance an investment property
For serious real estate investors looking to build an investment portfolio, there are essentially three rental property loan options: agency loans (Fannie/Freddie), local banks, or an alternative lender such as Visio Lending. Let’s look at all three options:
Alternative lenders, sometimes referred to as Non-QM lenders or DSCR (Debt-service coverage ratio) lenders, offer investment property loan programs specifically designed to help SFR investors grow their investment portfolios. Since alternative lenders are not confined to the rules set by bank regulators or GSEs (government-sponsored entities), they offer a lot more flexibility and appealing terms, such as 30-year terms.
Additionally, most alternative lenders underwrite their loans based on the cash flow of a property rather than personal income. That means they have low document requirements and do not review your employment history or tax returns. There are some drawbacks to alternative lending, yet most seasoned investors are comfortable with them:
Agency loans are the least expensive type of loan, yet the most complicated to obtain. Lenders typically underwrite agency loans based on a holistic review of an investor’s cash flow, including personal income from stable employment and net operating income from rental properties. These loans have some drawbacks for investors including:
Some real estate investors have success financing their investment properties with local or regional banks. Because banks plan to retain these loans rather than sell them, they can be more flexible on underwriting in exchange for higher rates and fees. Banks, however, cannot portfolio 30-year loans, so they typically write five-year or ten-year loans on 15, 20, or 25-year amortizations. Some of the drawbacks of working with a bank are:
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 much more stringent 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.
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.