When purchasing a rental property, you will have the option of selecting the most suitable financing package for your budget and requirements. Lenders have various rental property loans that a borrower might have trouble deciding which is the most suitable for their needs. We’ll look at the various categories of rental property mortgages that might satisfy your situation.
Investors seeking to acquire rental properties usually prefer hard money loans. Short-term loans for fix and flip or bridge loan investments are usually made on this basis.
The loans are usually intended for projects which have to close quickly and fund quickly. It is a loan that normally comes from private lenders, and is put against the property for security purposes.
Most often these loans have higher interest rates compared to traditional ones and give more flexible terms of reimbursement. However, it is important to note that most hard money loans have a short-term duration, thereby requiring more funding a short time later.
Do hard money loans or fix and flip loans work best for property renovation? Yes and no. It depends on your plans in connection with the property.
Fix and flip loans are better if you plan on flipping it immediately, within 4-9 months, because their terms are much shorter but they require less initial up-front funds. On the other hand, you might want to consider choosing a hard money loan ranging from one to three years, especially if you have an opportunity to lease all or part of the property.
Therefore, it would be a good idea for you to somehow combine those two types of loans, especially if you need additional funds beyond the purchase price for repair purposes.
DSCR Loans
DSCR loan as it is called, simply states that, the property’s net operating income determines how much he or she can borrow from the lender. A borrower seeking to buy a rental property should demonstrate the actual property individually service this loan by showing they have enough cash flow.
Typically, the DSCR must be more than one for a lender to approve the loan. The borrowers should at least leave 10% of their net rental income as residual income which is obtained by subtracting one from net debt service coverage.
This loan differs from a fix and flip loan or a bridge loan that is a temporary loan meant for a special business purpose. The ability of the property to repay the DSCR loan over a much longer term of 30 years is what makes them ideal or suitable for rental property investors.
Before applying for a DSCR loan, borrowers must take into account the fact that their DSCR will determine the size of the loan granted.
Can you obtain a loan with a DSCR of less than 1.0?
Yes, but in case of debt service coverage below 1.15, lenders may demand some form of collateral, such as a higher down payment, additional liquid reserves, and higher fees.
Unlike a fix and flip loan, DSCR loans can help investors have peace of mind when purchasing a rental property as they are tailored for long-term lending investors.
DSCR loans usually feature fixed interest rates based on a regular amortization schedule which helps investors to plan for the future, unlike the short-term fix and flip and bridge loans with balloon payments in one year.
Ultimately you must consider all these factors before choosing between a fix and flip loan or DSCR loan to fund your investment property transaction.
Bridge Loans
Bridge loans are short-term loans that can be obtained to facilitate purchasing your investment property immediately if you meet certain conditions such as having equity in your current property. These type of loans are normally sought in cases where it’s necessary to close the purchase contract terms fast, like 15 days or less, and you’re short on funds as well as time. But the property you want to acquire checks all the boxes for your needs.
Some bridge loans are also obtained because the property is in disrepair and requires improvements while the buyer doesn’t have sufficient funds to cover buying, closing and repairs. So, prior to anyone moving in, the property will be rehabbed or remodeled to add value and potentially increase income.
A bridge loan could be a great choice for investors seeking funds for an investment property on short-term basis without conventional funding. In general, almost all bridge loans have higher rates of interest, higher loan origination fees and closing expenses.
Bridge loans are not underwritten like a traditional loan as the debt-to- income ratios can be very extended. The lender understands you’ll be selling one property to pay for this one within 12 months.
In general, bridge loan funds have become very popular for those who desire to acquire and fix up a property within a short period but do not want to delay with conventional lending waiting for their property to sale or be forced to sell their current property below market value due to needing those funds for the purchase.
“It’s great for projects that don’t require too much work and you can get your money in as little as 7 days.” John Sunderland. has used a bridge loan for some of his projects and finds it a great way to finance a more lengthy renovation.
“A bridge loan allows me to get the cash I need up front and then I can refinance into a long-term mortgage when I’m finished,” he says.
Fix and Flip Loans
Property flipping loans provide an excellent opportunity to quickly flip a property for profit after renovation. It is a short-term loan which enables the borrower to get quick money for repairs or re-modeling on a property without having to wait for a traditional longer-term loan to get approved. This gives investors with buying and selling property within the contract stipulations and remains a good choice for investors.
As mentioned, the first advantage of using fix and flip loans is that it takes a very short-time to secure your cash. With a Fix and Flip Loan, the processing is much faster compared to a hard money loan which requires an appraisal before approval of the borrowed money is expedited making it possible to receive your funds in just 7 days as opposed to 15 days or even over a month with conventional financing.
Secondly, fix and flip loan costs are relatively lower when compared to hard money loans. This means that they are suitable for people who want to spend less when they invest.
On the other hand, Fix and Flip loans often demand the borrower have good credit to qualify. The message is clear. If you have low credit ratings this will be a loan you likely will not qualify for.
Furthermore, you will pay more money on fees as a premium for the quick turnaround and you could also be required to provide other assets and documentation close a fix and flip loan. The lender will require that you document your house flipping history as well and how much cash you have in reserves.
Overall, Fix and Flip Loans offer a fast way of making the necessary improvements so a fast sale can be made on your end. They provide a great alternative to hard money and offer their services with faster turnaround time and low interest rates or fees that one gets when investing on such projects.
Simply make sure that you conduct extensive market research on all financing alternatives available.
Multifamily Loans
The other common type of investment mortgage includes multifamily loans which are used to finance larger multifamily properties with either two- to four-units or five units and above. The borrowers of these loans most often use them for purchasing a rental property while for current owners who need additional capital or personal income, refinancing an existing loan on their income-producing property.
The interest rate for multifamily loans, like residential loans, is usually calculated based on the amount of the loan. This is not a rule by itself; however, the terms for a large loan tends to have a low interest rate. This is logical because larger loans are considered safer for lenders considering they have more units to scale income higher.
Is it possible to purchase a duplex or fourplex using a traditional loan?
Yes, a 20-25% down payment will be necessary for a conforming loan or non-QM loan that will finance the purchase of rental property.
The DSCR loan has become widely popular for residential units and now for multifamily properties as well. In this case, the lender evaluates if the property generates enough income based on the rent payments to repay the loan.
The DSCR of the subject property should be high enough so that receive favorable loan terms, including the interest rate. Of course, these loans can also help to finance 2-4 unit properties. One can buy a 5- to 8-unit residential building on DSCR loans as well.
A bridge loan may prove more appropriate than a large multifamily property purchases since it allows speedy closing time. Bridge loans are temporary one- to two-year mortgages taken to purchase a residential or commercial property and pay any short-term debts to developers, rehab crew, and cosmetic upgrades.
Bridge loan typically carry higher interest rates than normal multifamily loans and may call for a larger deposit as well. Nevertheless, they are perfect choices for investors who want to get access to quick and easy money.