Conventional Loans for Rental Properties
Conventional mortgage lenders do write direct rental property loans. But they’re a pain in the a$$ in every way.
First, the upside: they tend to cost less than portfolio loans. You can potentially borrow money at a 0.5-1% lower interest rate on investment property loans. Plus, they tend to charge fewer points than portfolio lenders. They also don’t charge private mortgage insurance, since they cap the LTV at 80%.
Unfortunately, it’s all downhill from there.
Conventional lenders are slower than portfolio lenders, demanding more documentation and coming back to you every few days to ask for more information. Expect them to take at least 30 days before closing, possibly 60.
They also require proof of income, unlike portfolio lenders.
Worst of all, conventional lenders report to the credit bureaus, and they cap the number of mortgages that can appear on your report. Most loan programs allow just four mortgages total — including your home mortgage, investment property mortgages, and any second home loans — before they stop lending to you.
That means you have a hard limit on the number of conventional loans you can take out.
Portfolio lenders keep loans within their own portfolios, rather than selling them off to giant corporations like Chase or Wells Fargo (the way conventional lenders do).
It gives them more flexibility, but it also means they hold the long-term risk for the loan. If you default, it’s their problem, not some faceless corporation’s.
Portfolio lenders are faster and more flexible than conventional lenders. Many can close investment property loans within two weeks if necessary.
They also don’t require income documentation such as tax returns, unlike conventional lenders.
Best of all, portfolio lenders don’t put a cap on the number of mortgages you can have. Quite the opposite — they prefer working with more experienced investors, and offer them better pricing.
A few of our favorite portfolio lenders include:
The down payment requirements are similar to conventional lenders’, typically in the 20-30% range. Portfolio lenders also require similar minimum credit scores, most often 680 for a rental property loan, but a few lenders allow as low as 620 (Patch Lending, RCN Capital) or even 600 (Civic Financial). They sometimes charge slightly higher mortgage rates, but not so much as to break your deal. Think 4.5%-5.5% instead of 3.5%-5% in today’s market.
While not every seller will entertain the notion of owner financing, many prove open to it if you make a compelling case.
You and the seller negotiate your own loan terms, from interest rate to fees to the length of the loan. In many cases, the seller demands higher interest than you’d pay to a portfolio lender, but lower (or no) points and fees. Those lower closing costs can easily offset the higher interest, since you’ll probably only have the loan for five years or so.
Most sellers don’t want to sit on a mortgage loan for the next 30 years, so they require a balloon payment. So, you might make monthly payments as if it were a 30-year mortgage, but within five years you either need to refinance or sell the property.
If the seller has a mortgage against the property, you may be able to buy the property subject to their loan. You assume the mortgage and start making the monthly payments.
The seller may not even pull your credit report, but savvy owner financiers will.
As with everything else in life, you get what you negotiate. Start working on your pitch, and you’ll be surprised at how many sellers warm to the idea of owner financing.
Other Private Loans
Sellers aren’t the only individuals who can lend you money.
You can borrow from family members, friends, neighbors, acquaintances, and anyone else with a pulse. In particular, you can find success borrowing from other real estate investors. For example, I have some of my personal money invested in a private loan with the Thompsons, who retired in their 30s on rental income.
Like seller financing, the terms are 100% negotiable. You negotiate the interest rate, fees, loan length, and whether the loan is secured with a lien.
To borrow money from individuals, however, you need a track record of successful real estate investing. You need to be able to prove that their money is safe with you.
Only consider borrowing from private lenders if you have at least five or six deals under your belt and can reliably forecast cash flow.