Investments

Essential Things You Need To Know About A Rental Property Loan


				
				Essential Things You Need To Know About A Rental Property Loan

Investing in real estate typically requires a good amount of money. If you don’t have a bunch of spare cash sitting around, you’re likely going to need to consider getting a real estate investment loan. Before moving forward to the different investment property loans, though, let’s talk about the types of rental properties.

Types of Investment Properties

To enlighten you more about real estate property, here are some types of rental properties you can invest in:

Residential: Rental homes are a common way for investors to gain additional income through the monthly rental fees from your tenants or renters. These can be condominiums, single-family homes, apartments, condos, and other types of residential structures.

Commercial: Rental properties do not always have to be residential. Other investors go on commercial properties that are used exclusively for business purposes. It provides a high-risk return because the improvements and maintenance can cost more than the residential properties. However, more significant gains can offset these costs because the rent for these properties is way higher than residential properties. These buildings may be classified as apartment buildings or retail store locations.

Mixed-Use: This property is designed for both commercial and residential purposes, which can be of dual-use. For example, a building may have a storefront on the main floor, such as a retail store, bar, or restaurant, while the upper portion or the back of the structure houses residential units. These properties may also be called income properties because you can opt to rent the building out to potential tenants while you are holding the title.

What You Need to Know About Investment Property Loans

Rental or investment property loans are used for buying out or renovating a property. These properties were either resold or rented out, and the loans you acquire for these properties are payable on a short-term or long-term basis, depending on your preference. These loans are available from large national banks, local community banks, and hard-money lenders.

How Do Investment Property Loans Work?

When choosing an investment property loan, keep in mind that the investment property or the building will act as the collateral. The money lenders will finance the renovation or purchase of the investment property.

In most cases, a hard money lender will lend you a portion of the property after repair value. The property will be estimated for its value on the market after the renovation in which they will lend you 60% to 80% of the property’s ARV(after repair value). This value or amount is different from banks because they base the amount of loan on the current market value, which is way lower considering the repairs and the current condition of the property.

As an example, an investor will ask the lender to finance the repair and purchase of a property. The lender will now evaluate the price of that property, the total cost of the repair, and the estimated ARV(after repair value). After these factors are considered, the lender will offer a loan depending on their LTV(loan to value) parameters.

They will also specify the payback period and the interest rate. There are also some cases where the loan will be split into two: the amount of property and the renovation cost.

Another example is the fix and flip loan, wherein the borrower will sell the newly renovated property to pay the loan amount and extract a profit. If the property is rented out, the borrower will opt to replace the term of the loan from a short term to a long term basis.

Different Types of Loans That You Can Consider

Moving on, banks and hard money lenders have different loan packages. Here are some detailed things about hard money loans and bank loans that may help you consider which type of loan you can get for your real estate venture: 

Hard-money Lenders

Hard-money lenders are usually private organizations or companies. They are more focused on the property, so the qualification process will not involve your personal information. They typically offer up to 80 percent LTV ratio of the after repair value for the loan amounts.

Here are some hard-money lenders in the real estate industry:

  • Visio Lending – They provide short term loans, commercial loans, and fix and flip loans with interest rates ranging from 10 percent to 12.5 percent, maximum of 75 percent LTV (loan to value) ratio, which starts at 100,000 USD. They have payment terms of up to two years, and their services are available in 39 states throughout the United States.
  • HardMoneyLoans.com – A national lender based in Beverly Hills, California, they cater to all kinds of loans for real estate projects. The amount funded starts from 500,000 USD – 75 Million USD while the interest rates start at seven percent and have a maximum loan to value ratio of 85 percent. They also specialize in commercial loans, residential loans, fix and flip loans, and bridge loans.
  • Patch of Land – A hard-money lender that offers funds all over the United States. They provide bridge loans, commercial loans, fix and flip loans, and refinancing. The amount funded starts from 50,000 USD to 3 Million USD. The rates start at eight percent, which is payable for up to 12 months with a maximum loan to value ratio of 85 percent. They provide services in the 45 states of the United States.
  • Anchor Loans – Based in California, this hard-money lender provides its services for 46 states in the United States. They are considered to be the most extensive Fix and Flip loan provider in the U.S., lending over 7 Billion USD since the start of their operation to real estate investors.

The loan amount starts from 50,000 USD up to 20 Million USD with a maximum loan to value of 75 percent. They offer interest rates ranging from eight percent to 13 percent and terms beginning from six months to one year for fix and flip loans. Other than fix and flip loans, they also offer different loan options like commercial loans, cash-out loans, and new construction loans.

The table below shows the comparison of these hard-money lenders:

Visio Lending HardMoneyLoans.com Patch of Land Anchor Loans
Loan Amount 100,000 USD to 2 Million USD 500,000 USD to 75 Million USD 50,000 USD to 3 Million USD 50,000 USD to 20 Million USD
Interest rate 10 % to 12.5 % Starts at 7 % Starts at 8 % 8 % to 13 %
Loan to Value (LTV) ratio Maximum of 75 % Maximum of 85% Maximum of 85% Maximum of 75 %
Terms of Payment Up to 2 years Up to 3 years 12 months / 1 year 6 months to 1 year

Bank Loans

Bank loans require a good credit score and a lot of documents such as debt to income ratios, a list of mortgages, and many more. Some examples of national banks in the real estate market include Wells Fargo, Bank of America, and U.S Bank. You can also find deals in local community banks or credit unions.

Before deciding, you can also consider these things:

  • Assessment

Bank loans also assess the property in its current market value, unlike hard-money lenders which assess the after repair value. It means you will get a smaller amount of money than how much the hard-money lenders usually offer.

  • Interest Rates

Banks usually offer lower interest rates. The rate starts at a five percent interest rate up to an eight percent maximum. These loans can have a value of up to 80 percent of the property before repair value.

  • Transaction

The transaction is much slower in banks, unlike the hard-money lenders, which is settled in just a matter of days. Typical bank loans transaction can take at least 30 days because the borrower has to get all necessary documents such as proof of billing, debt to income ratio, list of mortgages, and many more. You must also be aware that if you are not qualified, you have to start the loan process from scratch.

  • Local Community Banks

For local community banks, some requirements that the large national banks require, like credit report and list of mortgages, are not part of the requirement. Hence, it’s quite easier to apply for an investment property loan in your local banks than in national banks.

However, they are not that cheap because the interest is usually higher than larger banks but lower than hard-money lenders. The interest rate for local community bank loans starts from five to 10 percent and usually follow the 80 percent of the before repair value for your loan amount. Local community banks have great deals to offer, so skim through their offers to find your perfect loan preferences.

Although local community banks have advantages, there are also disadvantages, such as slow transactions the same as large national banks. Typically, they need 30 days to settle a loan transaction. Another one is that the local community banks’ services can not offer you all types of real estate loans. They are not as broad as the local banks, so the transactions you can make are limited to what they can serve on the market. Be sure to check their offers thoroughly as some of them cannot be refunded or can be canceled immediately.

Hard-money Loans vs Bank Loans

Banks and hard-money lenders have different offers for investment property loans. Here are some of them:

  • Speed – Typically, bank loans can take two to five weeks to arrange the transaction because of an in-depth assessment of the borrower. On the other side, hard-money lenders usually settle an arrangement within two to five days because they focus on the property, not on the borrower, who is much easier to evaluate.
  • Property Types – The eligibility of a property is also considered in applying for a rental property loan. Most banks focus on commercial properties and single-family homes while hard-money lenders have a wider scope of properties that are eligible. These include bridge loans, fix and flip loans, new construction loans, and mixed-use property loans.
  • Access – Banks are usually looking for documents such as income to debt ratio and more. They also have high credit score requirements. hard-money lenders focus on the property and usually do not look into the borrower; the property is much easier to assess than a borrower.
  • Cost – Hard-money lenders typically have a 10% to 19% interest rate while the bank has a 5% to 10% interest rate. If you have a good credit score, expect to pay less interest in a bank loan than a hard-money loan.
  • Amount Financed – Hard-money lenders will give you 60% to 80% LTV (loan to value ratio) of the after repair value while the bank will assess the property on its current market value and can give you up to 80%.
  • Loan Term – Bank loans and hard-money loans usually have the same amount of loan terms. Typically, three to 12 months after the loan is acquired or approved.

Here is another loan you can consider if you want more flexibility in terms of interest rates and terms of payment.

Private Funds

Family members usually finance private funds. This type of loan can be considered as the most flexible in terms of interest rates and terms of payment because you can negotiate with family members or relatives for lower interest and longer payment terms. However, this loan has a higher risk because it can destroy the relationship between family members when the venture is not successful.

The amount you can gain from these loans can be much smaller than bank loans and hard money loans when you are just starting your real estate venture. As your portfolio grows and the trust of your family members in your capabilities improve, these funds can grow larger.

Conclusion

Real estate investing is a risky venture but has the potential of giving you back a big payoff. Finding the funds to take advantage of an investment opportunity does not have to be a hindrance if you know the things to consider.

When comparing different sources of funds from lenders, always check the costs in between these loans to maximize your profit and how it can affect the investment’s progress.

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