5 Major Types of Rental Property Loans for Property Investors

Key takeaways:

  • Go through the top 5 types of rental property loans that can help you invest in your next rental property.
  • Associate with professionals who can assist you with the process and minimise your financial troubles.

Are you looking to invest in a rental property?

Do you want to know the best loan deal available for your goals?

Whether you are investing in a rental property for the first or twelfth time, chances are you need a real estate loan.

Different rental property loan types are available, but which is best for your investment goals?

Let’s find out.

5 Different Rental Loans to Purchase Rental Property

You can have multiple loan options to purchase a rental property, but we’ll explore the five best loan types for your investment journey.

Conventional mortgage

A home loan includes similar financing if you were purchasing a house. Conventional mortgages include adjustable-rate mortgages (ARMs) and fixed-rate mortgages and offer low-interest rates with flexible terms of any rental property financing.

To qualify for a conventional mortgage approval, you’ll need to prove that you have an income to pay for it. You require a debt-income ratio (DTI) under 45%, meaning your monthly debt payments should be less than 43% of your before-tax income. 

Also, many lenders consider 75% of the rent as cash flow to count towards that property’s Principal, Interest, Tax, Insurance, and Association (PITIA).

Conventional mortgages are best for owner-occupied rental properties and investors with a maximum of 10 rental units (after 10 loans, you need a commercial loan).

Home Equity Loan

If you have a property and have some equity built up, you can access equity to pay a down payment on your property investment. 

Here are the ways to access your existing home equity:

  • Cash-out refinancing can help you access home equity by refinancing your existing mortgage and taking a segment of the mortgage as cash. You can also refinance based on the terms of your original mortgage to improve your cash flow.

For example, if you financed a property with a 20-year fixed-rate mortgage and then decided to refinance with a 30-year mortgage, you can access cash and lower your monthly payments.

  • Home equity loans (HELs) and home equity lines of credit (HELOCs) enable you to borrow against your home equity and are called a second mortgage. You can borrow up to 80% of the appraised value based on the subject property and your DTI.

Irrespective of your option, this type of rental loan has a downside. These loans can be costly to originate, making the actual borrowing cost much higher than it appears.

Home equity loans are best for investors with considerable equity in other properties.

Portfolio loans

You can choose a portfolio loan if you don’t qualify for a conventional mortgage. Unlike conventional mortgages, portfolio loans stay with the lender and are not re-sold by the lender on the secondary market.

Depending upon your lender, you can get a higher DTI, get approval on a higher credit score, or have a smaller down payment. Portfolio lenders can also offer financing that frees up cash flow, like balloon loans.

However, portfolio loans have higher interest rates than conventional mortgages. They can have prepayment penalties and higher origination fees.

These loans are best for property investors who don’t qualify for a conventional mortgage.

Private and hard money loans

There are limits for portfolio lenders. As you increase your real estate portfolio, there will be a time when you won’t qualify for any type of conventional mortgage. 

That’s where you can consider private lenders to fund your expansion. These are not financial institutions but investor groups willing to lend you money for property investment.

Any underwriting policies do not bind them, so they can finance your rental property purchase when you don’t qualify for a loan. Private and hard money loans are best for real estate investors who don’t have conventional financing options.

Real estate limited partnership

If you aggressively increase your property portfolio, you can find better financing options by partnering with one or more other investors.

It can be beneficial if you already have multiple properties and want to grow your financial investment without more work.

But this type of financing can have a downside. You must work with others, trust those you’re partnering with, and get legal advice for sorting all the fundamentals.

A limited real estate partnership is best for active investors who want to grow and diversify quickly.

Out of these five major types of rental property loans, you can choose one based on your goals and requirements. 

If you find it overwhelming to figure out the right option, you can consult professionals at P&A Property Sourcing to make an informed decision.

Choose P&A Property Sourcing

At P&A Property Sourcing, we help you finance your next rental property investment. 

We work in Birmingham and many other places in the UK, such as Coventry, Dudley, Nottingham, Derby, Manchester, York, London, Leeds, Bournemouth, Weymouth, Torbay, Cardiff, and Oldbury.

Our team can analyse your requirements and arrange all the paperwork and network to ensure you get the required funds for your investment. 

We can help you get an excellent rental income and even find properties in other countries if you’re interested.

So, what’s making you wait?

Contact our experts to discuss your requirements.

FAQs

Can you get a loan for a rental property?

Yes, you can get a loan for a rental property. Various types of loans are specifically designed for investing in rental properties, including conventional mortgages, home equity loans, portfolio loans, private loans, and loans through real estate limited partnerships. Each loan type has its benefits and drawbacks, so choosing the one that best fits your investment goals and financial situation is important.

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