While high-tech entrepreneurs like Elon Musk and Jeff Bezos get all the credit, don’t be fooled. Most millionaires today built their wealth by investing in real estate, not by starting their own company.
And you don’t need to be a wealthy business owner to invest in real estate. Those who live on the average annual income can build up their rental property portfolio over time.
How is this possible? Because you don’t need to buy properties with cash, though that can be a helpful strategy. With a rental property loan, you have the unique opportunity to leverage your investment in one of the safest ways possible.
Borrowing money in order to acquire other assets, like stocks or cryptocurrency, is very dangerous. But borrowing for real estate? it’s one of the smartest moves you can make.
Wondering how to get a loan for a rental property? Read on to find out how.
Contents
Know What Type Of Property You Plan To Buy
First off, you need to know what type of property you plan to buy. Most new investors are looking to purchase a one to four-unit property. A single-family residence is the most common.
But many investors like to maximize monthly cash flow by purchasing a duplex, triplex, or quadplex. The same loan that would cover an SFR would also cover a two to four-unit property.
Anything over four units would require a commercial loan, rather than a standard rental property loan. Getting a commercial loan can be much more difficult and is best to do after you’ve developed a track record managing smaller properties.
How Is A Rental Property Loan Different?
Rental property loans usually have more stringent requirements than loans for your primary residence. When buying your primary residence, loan options are available that let you put as little as 3.5 percent down.
With a rental, you’ll need to put down at least 20 percent and sometimes more. Rental property loan rates are also higher than the rates on primary residences.
Unique to rental properties is the need to demonstrate reserve funds. Lenders know that a rental property isn’t going to be occupied 100 percent of the time. So they usually want to see three to six months’ worth of mortgage payments saved up before you get approved for a loan.
Getting a loan for a rental property might be easier than a standard loan in some instances, however.
Some lenders, instead of looking at your credit score to approve the loan, will look at the projected monthly cash flow. So it’s the house and the income potential that it has that will qualify for the loan, rather than your personal finances and credit score.
So if you’d prefer not to rely on your credit score, find a lender that offers loans based on cash flow instead.
Save a Down Payment
The biggest thing you’ll need to do when getting a home loan for rental property is saved up for the down payment. There’s little flexibility here, and 20 to 30 percent is the norm.
Many new investors will utilize the equity they have in their primary residence to fund the down payment of a rental. They can do this by either taking out a home equity loan, getting a HELOC, or performing a cash-out refinance.
Others will seek out partners who can help fund the deal, in exchange for part ownership of the property.
But new investors looking to get creative can try house hacking instead. House hacking is the concept of purchasing a two to four-unit property, living in one unit, and renting out the others.
By doing this, you won’t need a proper rental loan, but you can qualify for a primary residence loan. This means you can pay anywhere between 3.5 and 20 percent down.
If you run the numbers right, it means that the rent from the other units can pay for the expenses on the property, so you live mortgage-free. Ideally, you even a profit each month.
Then, once you’re ready to move out, you can purchase a new primary residence using a homeowner loan, while keeping the multi-unit property as a full rental.
Run The Numbers
When getting a rental loan, one of the most important steps is to carefully run the numbers on any rental property you are considering. You need to know exactly how much you are going to spend with a down payment and closing costs. You need to know how much money you need to have as reserve funds.
And you need to know the expenses of the property. The most important expenses are PITI, or principal, interest, taxes, and insurance. But you’ll also want to consider any maintenance and remodeling expenses.
Then, determine how much a property will be able to rent for in the current market. You want to ensure you can make a monthly profit after all of the expenses.
These numbers may be used by the lender to determine the viability of the loan.
Different Types Of Lenders
Now that you know what it takes to get a loan, you need to find the right lender to work with. Not all lenders are created equal.
There are many lenders, such as Kiavi, that cater specifically to investors purchasing one to four-unit homes. Kiavi rental loans make the process of loan approval fast and easy for investors, by eliminating much of the tedious paperwork associated with a primary residence loan.
Other alternative lenders are available that offer non-qualifying mortgages. These are loans that don’t follow the same borrowing principles as standard home mortgages.
For those who are self-employed, business owners, or who have complicated personal finances, these are the best options.
Of course, if your financial situation is clean and clear-cut, you can approach major banks that offer agency loans from Fannie and Freddie. Or you can go to your local banks and credit unions for a more personalized approach.
There’s Always A Way
Getting a rental property loan today is much different than in the past. There are many different options for financing rental properties, and there is no single approach that outweighs the others.
The best loan is the one you can get, that helps you build your wealth and your portfolio. And if one lender turns you down, there’s always another to try.
Looking for more wealth-building tips? Visit our blog now to find other helpful articles.