Rental Property Loans: A Complete Guide for Landlords

Property Management Blog

The real estate market has many different dimensions and the home buying market is one of them. media and economists give it particular attention as it concerns common people. Single-family residential is also called SFR and it’s flourishing.  This segment of real estate comprises one-third of the rental market in the US and there are 16 million units in it. 

Local real estate investors are the owners of the single-family rental units, although some new agencies are also getting involved now. The demand for these SFR is increasing as new young couples are getting married and want a separate house. Some youngsters want these units just because they own pets. These people don’t want to indulge in the problems of ownership. If you want to have some passive income without any extra work, SFR is a good opportunity. However, it is very important to understand how you should finance your investment property to get maximum return. 

Rental property loan

It is a residential loan, which is secured by the SFR property, and occupied by the tenant. In order to qualify for this loan, the property should be ready to rent. This kind of residential loan can be long-term and short-term, depending on the investment target. It is important to know that if the rental property needs repairs, you will need another loan to get it repaired. 

How to finance a rental property?

When it comes to financing a rental property, multiple ways are available. Lenders have different requirements from landlords. The landlord must have a diverse capital structure and should apply for the right kind of loan. A wrong loan can badly impact their investment. You have different financing options which are mentioned here. 

Hard money loans: Hard money loans are also known as a bridge loan. It is a short-term loan that is taken for the investment property. These loans are available at flexible terms as the lender is interested in the value and profitability of the property, which both parties can use. Landers are flexible about the employment history and credit score of the applicants, so you can get the loan money in a short time. 

Bank loans: Banks work according to very strict guidelines, when it comes to property loans. Hard money lenders are flexible but banks are not. The loan process is very long but the interest rate is lower than other lending agencies. So, if you have a good credit score and you have time, bank loans are the better option. 

Private money loans: These are personal loans, which you can take from a family member, friends, or colleagues. Many real estate investors start their business with private money loans. However, if you don’t have any close relations who can lend you money, you can connect to the network. There are some websites and platforms where you can find money lenders. These people are interested in investment opportunities, provided you will give them their due share. 

Existing equity: if you have a home as your primary residence, you can get a loan on home equity. A home equity loan is also called a Home equity line of credit or HELOC. You can use this loan to finance rental investment property. The amount of the loan can be 0% of your home’s value. You can use this money to buy a new house or to repair or renovate the investment property you already have. 

Rental property loan expectations

If you already have bought your house through a mortgage, the process to get a rental property loan will be similar to that. You have to follow the given steps. 

  1. Search the lender, you can consider the above-given options according to your credit history and situation. 

  2. Fill out the application form. These application forms can ask for more details than a typical mortgage application. 

  3. Lender will ask about the details like credit report, income validation, and other similar documents. 

  4. The last step is the appraisal of the property.

Once the procedure is complete, you will get the loan according to the timeline of the lender. 

How to qualify for the loan?

When you apply for the loan, the lender is interested in your financial situation, more than anything else. As mentioned earlier, the property should be ready to be rented. Construction is not included in rental property loans. If you want to do construction, you need to take separate loans and hard money lenders are appropriate for that. The lender will check if the property needs extensive repair or if there are any problems that need to be resolved, before lending you money. 

Get your finances in order: firstly, you will need a cash reserve for 6 to 12 months. They will ask for proof of your monthly income and credit history. Cash reserve reflects that you can survive hard times even if there is no tenant in your house, and you will be able to pay the monthly installments. 

Get ready with a 20% down payment: It is the standard down payment for everyone. However, if you have a good credit score, your lender can ask you for 15% too. On the other hand, if your credit score is very poor you should be ready to pay more than a 35% down payment.

Improve your credit score: if you want to apply for a rental property loan, you should know your credit score. If possible, try to improve it as much as you can. Paying debts is the key to improving your score. If your credit history is short, you can choose new credit lines. Once you have applied for the loan, leave the credit as it is. 

To prove that you have the necessary finances to buy the rental property, you will need some documents. It will include income proof, tax returns, credit reports, and bank statements. 

Hopefully, this article will help you to understand the basis of rental property loans. It is important to know your financing options. Real estate investment is a great way to generate an extra money stream. But you have to plan it properly. 

If you’d like to talk more about property management, or you need help with Everest Property Management, please contact us at Everest Realty.

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