103: What are the Best Real Estate Investment Loans?
One of the biggest problems facing real estate investors is finding the money to buy houses. I have been an investor and agent for over 15 years, and with 15 rentals and up to 20 flips going at once, I still find myself looking for more money (doing 20 simultaneous flips could be why I am looking for more funding!). There are many ways to get money for a rental property or a flip, but today, I will talk about the best loans for investment properties. Most people with great credit and verifiable income can get a loan when first buying properties.
Once you buy a couple of properties or have multiple mortgages in your name, finding a bank that will lend you money can get tricky. I feel that banks are the best financing source because they offer the lowest rates and the longest terms. If a bank says they will not lend to you, do not give up on banks: find the right bank. There are many different types of banks and lenders who will lend to real estate investors. On this episode of the InvestFourMore Real Estate Podcast, I review the best loans for beginning, intermediate, and advanced investors.
What kind of loan can you get when you first buy an investment property?
Getting a loan on your first investment property is not terribly difficult if you meet most lenders guidelines, which are:
- A good credit score.
- Good debt-to-income ratio.
- Verifiable income.
- A good job history.
- No recent foreclosures or bankruptcies.
Many people meet a few of these guidelines, but it is not easy to meet all of them. If you buy the most expensive house you can afford to live in, it can make it almost impossible to buy a rental property. If you decide to switch careers or retire, it can also be very difficult to qualify for a loan. If you happen to to meet all of the guidelines most lenders require for investment properties, you can get a loan at a great rate that is fixed for 30 years. Rates are a little higher on investment properties than on owner occupied properties yet still currently come in at less than 5 percent.
In most cases, when you get a loan on an investment property, you will also have to put at least 20 percent down. You will have to pay for closing costs as well, which can be 2 to 4 percent of the loan amount. If you want to get a really good deal, you may have to buy a house that needs repairs. To buy a rental property that costs $100,000, you may need more than $30,000 in cash when getting an investment loan from a bank. It can be expensive to buy a rental property, but they are a great investment.
When you are first buying investment properties and meet all the guidelines I discussed, most big banks will give you a loan. However, big banks are not always great for investment property loans. If you do not have a lot of money, there are other options. It may be possible to buy a future investment property as an owner-occupant and put much less money down. There are also some amazing tax benefits when you buy as an owner occupant.
What loan options are available for investors who have multiple properties?
Once an investor gets a few loans in their name, big banks become much more difficult to work with. Many big banks will say it is impossible for an investor to get more than four loans in their name. I have even had people ask me through email how to get around the law that states no one can have more than four mortgages. There is no law that says you cannot have more than four mortgages in your name. Big banks have many rules and guidelines they require borrowers to adhere to, and they’re not an investor’s only option.
I have used a portfolio lender to finance all 15 of my rentals properties, my personal residence, and many of my flips. A portfolio lender is a local bank that does not sell their loans to the secondary market. Most big banks sell their loans to either another bank or Wall Street. When a local bank does not sell their loans, they can be much more flexible with how they lend money. Many local portfolio lenders do not care how many loans an investor has in their name, what their debt-to-income ratio is, or impose other guidelines that big banks do. Make sure to listen to the podcast to get more details on portfolio lenders!
How can advanced investors get loans on investment properties?
Some big banks will lend on up to 10 properties, but you must have great credit, great debt-to-income ratios, and perfect financials. When you have more than ten mortgages in your name, it becomes almost impossible to get a big-bank loan. It can be tough to get a loan from a portfolio lender with more than ten mortgages as well. There are more options for investors who cannot qualify with a traditional lender. There are national rental property lenders who do not care how many mortgages you have, what your debt-to-income ratio is, or even if you have verifiable income. These lenders only care about the numbers on the property: will it cash flow, what is it worth, and where is it located?
Banks are a great resource for financing properties, but they will want to see stellar financials. Luckily for investors, there are more options available. Portfolio lenders and rental-property lenders can be a great resource. There are also hard-money lenders, BRRRR strategy, and many other options I talk about.