What Every Investor Needs to Know about Loans for Rental Property

What

every

real estate

investor

needs

to

know

about

rental

property

loans

. Whether you own a

rental

property

now or have any plans in your career to own a rental property, you need to

know

the wisdom that I'm going to share with you in this video and that's because

every

rental property

needs

a loan. I've never been a fan of owning a rental property free and clear. In fact, I have a video that demonstrates why this is such a bad idea. I went so far in that video as to say it's financially irresponsible. Do not have a loan on a rental property as long as it is a long-term loan with an ideally low fixed interest rate.

So where do these

loans

come from? you are a good

investor

, that is

what

this video is about and I am going to focus on residential real estate, single family homes, duplexes, triplexes, up to four units, vacation rentals in this video, these loan options that you will learn and the The little tips and Tricks along the way apply to residential housing, not commercial, so let's dive in. There are four main sources or types of lenders that provide the best rental property loans for investors. We will start with the conventional ones and then continue until the end.

Let's get into the portfolio and I'll share with you the pros and cons of each, where they fit and for which investors, so you can find the best option for your next rental property loan. You may be familiar with a conventional mortgage. These are loans. sold in the secondary mortgage market to Fannie Mae Freddie Mac Almost every bank and mortgage company in existence originates conventional loans. This is the majority of mortgages in the United States. This is

what

they are, but they are mainly for owner occupants and people living in the house. as its main residents, but what about the investors?

Can investors get conventional loans? Yes, they can because Fannie and Freddie will purchase non-owner occupied loans if you are a single family of up to four units, but it comes with all the strings attached, like having to verify income and have a perfect loan application, so for many investors This is difficult to achieve, but I am going to tell you one more part. The most important parts of this conventional have one gigantic weakness and that weakness is that it will not allow you to own a rental property in an LLC, you must purchase the property in your personal name and therefore what some investors have done over the years as they say it's not a big deal Phil I'll buy it in my personal name and then I'll stop claiming it in my llc well let me tell you a couple of major problems with that brilliant number one strategy when you move the property to the llc, you void your title policy, so if you have a title problem in the future The Road could be a big problem because your policy was just voided and you just paid good money when you bought that property.

The next problem is that in many states it started in Florida, but many states have realized what they are doing now. Do you charge a recording tax for the same amount as the mortgage? So I know that in one deal that I did, I did this conventional loan because it was a second home loan because I was doing a vacation rental, it was my first, many, many years. ago and when I moved to an LLC they charged me recording taxes for recording that quick claim deed which was an extra five thousand dollars, so not only do you have a problem with the title policy, but you also have a problem with having to potentially paying more registration fees and then The last issue is the actual insurance because remember you are purchasing your own property subject to transfer to an LLC after closing so sometimes it can be a real hassle with your insurance company, your insurance rates go up so I'm not a fan of investors getting a conventional loan for their rental property and here's why there is an option that gives you the same benefits as conventional and what those benefits are quickly when It's about interest rates.

They have the lowest interest rates. Well, now they have them. They have the highest amount of I'm going to call it requirements, you know, they have the highest requirements but they have the lowest interest rate, but how can you have your cake and eat it too if you look good on paper, if you can? get a conventional loan, well that's where we get to the local banks and credit unions, not all of them are going to do this, you'll have to make some phone calls, but you will find that certain local banks and credit unions will.

If you have the same underwriting guidelines as a conventional loan, you will get a very similar, if not the same, interest rate as a conventional loan. The requirements will be the same, but you will be able to use your LLC as the owner, so local banks are a great option. option for rental property owners, many of them do this now, it changes constantly so what a local bank would have an appetite for at any given time they no longer do with ebbs and flows so I don't have a list for you of local banks or credit unions to work with here in this video because it's always changing but this is the place to go if you look great on paper as a rental property owner this is the place to go go to obtain your loan. benefits of conventional while you may own an LLC, but what if you don't look perfect on paper like most real estate investors?

You don't have that huge W-2 income flowing in, maybe you have decent credit, but if you can't demonstrate income the way a conventional or local bank wants to see it, then where do you go? Non-QM Lenders. What does QM mean for qualified mortgage? You can Google this phrase Non-QM Lenders and you will be able to see a full list of them, so Non-QM Lenders is where so many investors operate because this is what happens, you have requirements slightly lower, the requirements are not so bad. I'll give you an example, maybe I can show a lot. income from your bank statements, but not from your tax returns because you can deduct a lot of things and a lot of projects that you've been working on.

Well, this is a perfect place. the way to the almost established income level, so it is not an excellent area to operate. Yes, you can own the property in your LLC. Yes, they will give 30 year fixed rate loans, now the interest rates are a bit. higher, so what's going to happen here if the going rate for a conventional or local bank loan is about a point, which we call a point in the mortgage world, a percentage to one and a half percent higher than the going rate if That is what they are? This is going to be like another, not exactly one point, but almost one point more than this area here, okay, there's an increase in rates, that's the phrase in the mortgage world when you're doing well, obviously, since you lived in the house until now. "You're a non-owner-occupied loan and that's where you get this increase from the going rate and then this is another increase from this rate.

Okay, now you get into this zone and you have a slightly higher interest rate, but you have requirements more flexible. Here's what you need to know about non-QM lenders. You don't go directly to them. You have to use a mortgage broker. These are wholesale lenders. They work through mortgage brokers instead of having a bunch of house to handle loan origination, but here's the problem. Mortgage brokers have a high level of flexibility in what they work and who they work with, and many mortgage brokers who are talented and skilled find that they can earn the same amount With non-QM loans as much as they can, and conventional ones, they have a much easier time, so one of the main problems that investors face with non-QM loans is finding mortgage brokers who are willing to work with them and who have experience with non-QM loans. lenders because non qm lenders ask for a lot of documentation it's usually not just the borrower it can also be the property itself so what happens is you need to treat the mortgage broker kindly because they might just leave it and it is very common in a project that I did recently just as a test.

It was funny that some of the mortgage brokers I've known for years and years don't say anything, I'm not going to mess with people who aren't qm. It's a pain in the ass, so they work harder for the same salary, so you have to build a relationship with a mortgage broker who is willing to do no-qm and has experience in it, because again, with the lack of requirements, yes Some other hassles will come and that is the secret of non-qm and one of the things I love about non-qm is the range in which they will work.

I recently did a deal where they were willing to do a 40 to 40. One year loan, first 10 years for interest, only after that it was amortized over 30 years, so no qm, there are some really interesting things that you can do there and as far as the names of some of the lenders, I'll tell you this if you talk to a mortgage broker they mention names like angel oak like um like citadel um like new res um those are the big ones okay and you can search on Google again google this phrase and search for some names also you want to talk to the mortgage brokers and interview them, have you done a deal with Angel Oak recently or another non QM lender and how did it go?

What were the terms? What are the details? So when you work with a mortgage broker, you have that double challenge that you have. Finding one that works with these groups and also likes working with these groups, so that's not it. Many investors will be in this area right here, but what if you don't look good on paper at all? true, you can't even show the income from the bank statement. Sure, like I said, there is some state revenue here, but non-qm lenders still consider you the borrower, but what if your property is awesome? What if cash flows well?

What if it's a very productive rental property but you on paper somehow look terrible? You need a lender that is not focused on you but on the property and you are not looking for a hard money lender, a short term lender you are looking for. For a long-term fixed rate rental property lender that focuses on property, where do you present yourself to portfolio lenders? These lenders have emerged in the last three to four years and not only provide hard money loans but also provide long-term permanent loans. 30-year fixed rate loans on rental properties and these portfolio lenders focus on the property much more than you as the borrower;

In fact, some of them all they look at is your credit to make sure it's at least 640 and then from there, all they focus on is the property. I did one as an experiment with a portfolio lender and I did it on a vacation rental and if they were completely focused on the income they had, they asked me to get statements from Airbnb and Vrbo and they might care. less about me personally, although I look perfect on paper, again I wanted to test everyone in my group and therefore portfolio lenders are amazing for investors right now.

Okay, what's the downside? The downside is that the interest rates are a little higher. so again, going down this scale, if this is plus one to plus 1.5 of the prevailing rate that you see listed for a typical home mortgage, this is about another point higher and then this is not quite, but I'll just do round numbers around one point higher usually so right now in today's numbers you know these are going to be somewhere in the four these are somewhere in the five these are probably in the six super low in the five upper six lower so if we're talking about a property that cash flow flows very well, but it doesn't look good on paper, go here, but there are other reasons why you would choose the portfolio.

Another example would be if you have too many rental property loans at any one time. They won't, they won't lend to you. No-qm might be a little more flexible, but even then they might stop, say if you have 12 loans, while these guys don't give a damn, in fact these guys like bigger portfolios. they love being able to lend on 20 30 50 80 properties they love that stuff the portfolio lenders have been amazing now, whereas it's hard to recommend a mortgage broker to you because I don't want you to call one of these people and then you know, someone just screwed it up. for everyone, very difficult because this is a moving target.

Anyway, I'm not a fan of this.I can recommend portfolio lender Finance of America Commercial. I have a great contact named Jerry Collins, actually, in the comments. section I have a link that will take you to their contact information. If you want to contact him, let him know I recommended him. He will take good care of him now. Finance of American Commercial is one of many of these portfolio lenders that have emerged, another, another important one, it would be core vest, another, vizio lending, lima, one lending, another, I have ties to them as well, but this group here has been a huge benefit to the real estate investors they serve.

Now we're sure their interest rates are a little higher, but they know who we are. They recognize what we are trying to achieve. Don't feel intimidated if you are trying to buy three properties in a year like a local bank or even some would. Non-QM lenders want people to own a lot of rental properties. They're one of us, so they're a big fan of portfolio lenders in case you can't go the non-QM route or the local bank route with your rental property. and even if you can, sometimes you can choose to go with them because they are so much easier, it's easy to get a loan through this group and before I finish, there is a really important subtopic that I need to share with you. and it has to do with the down payment, what is the down payment requirement for this?

Well, almost unanimously you are looking for at least 20 percent down on a purchase and if you are doing a cash out refinance, they will usually require 25 percent equity or a 75 ltv loan, so Some people hear that and say, but Phil, what's with all this with no money down? Well, no down payment deals are usually done by structuring them with the homeowner where you take out the loan is subject to or do the owner financing, but they are rarely long term deals, usually when you structure them subject to may the seller only allow it for a couple of years or owner financing for a couple of years.

So if you are looking to do long-term deals, you should consider doing these types of loans, getting a hard money loan or doing a short-term deal, renovating and stabilizing the property and then doing a cash-out refinance. With one of these loans, I get this bewilderment from people who think that they can become rental property investors and purchase all these properties with incredibly good cash flow with no money down, that's not how it works, instead That's what we recommend is using it. the creative no down payment techniques to make a lot of money to produce large amounts of cash and then what you do is you take those amounts of cash and get these types of loans to buy the right rental properties that flow well in cash. the correct locations, does that make sense?

So, you're not going to get around this down payment requirement. What you are going to do is find a way to get the money for the down payment requirement, either in the form of cash or in the form of equity when you do a cash out refinance. I hope it was useful to you. I hope this was very valuable information that you can use and apply. If you have additional questions or comments, please write them below. I try to make time in my schedule to answer them and if I haven't introduced myself I'm phil pustiovski from freedommentor.com where we specialize in mentoring and training and turning complete beginners into money making machines and if you don't already I have.

I gave away my book on how to be a real estate investor for free in these videos, so be sure to consider the apprentice program where my team and I will take you from beginner to complete winner. Very well thank you. Much to see. I also mentioned at the beginning of the video why you should never own a rental property and this free, clear video demonstrates why that is the case. Thank you all, see you in the next video.