Landlord Loans: Buy, Rehab, Flip or Keep
Short-Term for Flips, Long-Term for Rentals
Real estate investing takes money. A lot of money.
But one of the greatest advantages in real estate is that you can leverage other people’s money to build your investment portfolio.
As we’ve talked to investors over the years, one of the most common questions (and complaints) is “Where can I find reliable loans for investment properties?” For your first few deals, you can probably get away with a conventional mortgage, at low-ish interest rates. But conventional lenders don’t like seeing multiple mortgages on your credit report, and quickly stop lending.
So at Spark Rental, we’ve reviewed dozens of industry lenders, and reached out to form partnerships with several lender who specialize in investment property loans.
Here’s everything you need to know to get started, first with landlord loans for long-term rental properties, and then we dive into some options for shorter-term fix ‘n flip loans.
Landlord Loans for Rental Properties
Looking for long-term financing, to buy a rental property? Or maybe you just finished renovating it on expensive short-term financing, and are ready to refinance for a permanent landlord loan?
You’ve probably already talked to several traditional banks. You know, the Wells Fargos and Bank of Americas (or is it Banks of America?), the mainstream lending banks. They typically offer reasonable interest rates and 75-80% LTV (loan-to-value ratio).
That’s the good news.
The bad news comes in three stripes:
- They often won’t lend to LLCs or other legal entities,
- They report the loan to the credit bureaus, and
- They don’t allow more than a few (usually four) mortgages on your credit report.
While one mortgage, maybe two, on your credit report can improve your credit, ten mortgages is good way to wreck your credit.
So where can you get a loan for your rental properties?
Long-Term Landlord Loan Options
Both are collateral-based lenders, who are more interested in the property itself than they are in you as a borrower. Visio doesn’t even ask for any income documentation at all!
We could wax poetic… but you’d probably rather just see a comparison chart:
|National Bank||Online Investor Flex Lenders||Online Landlord Lenders|
|Lender Example(s)||Wells Fargo, US Bank||LendingOne||Visio Lending|
|# of Units||1-4||1-4||1-4|
|Loan to Value (LTV)||75-85%||Up to 80%||Up to 80%|
|Debt-to-Income Ratio (DTI)||35% - 45%||No income docs required||No income docs required|
|Cash Reserve Requirements||6-12 months' PITIA||6 months' PITIA||1 month's PITIA|
|Loan Points||.5 - 1.5||1-3 (varies by borrower)||0-5 (borrower can buy down interest rate)|
|Repayment Term||15 or 30 Years||3-30 Years||30 Years|
|Time to Funding||30-60 Days||10-14 Days||30 Days|
|Loan Limits||$50,000 - $424,100||$75,000 - $2M||$75,000 - $2M|
|Prepayment Penalties||Varies by lender; as high as 5% within 1 year||80% of 6 months' interest within first 3 years||5 years typical, 3 years optional|
|Where to Apply||Wells Fargo, US Bank||LendingOne||Visio Lending|
Not sure what all those terms mean? Don’t sweat it – we have a Mortgage Glossary at the bottom of the page!
Short-Term Buy & Rehab Loans for Real Estate Investors
Not every investor – or even every landlord, for that matter – needs a 30-year fixed mortgage.
Sometimes you just need a quick loan to buy a new property and renovate it!
Typically, the process works like this: you settle within 10-14 days, with money escrowed for renovation draws. You do the first round of work (AKA the first “draw”), and the lender sends an inspector out to review the work.
If the work in the first draw is complete, the lender releases the money for that draw, to reimburse you. Then you do it all over again for the second draw, and so forth.
For example, you borrow $75,000 for the purchase, plus $30,000 for renovations. That $30,000 is split into five $6,000 draws.
The first draw may involve replacing the furnace, updating the ductwork, and replacing the air conditioning condenser. You and/or your contractors do that work, the lender comes out and inspects, then releases the first $6,000 to you. And so on.
Online Options for Purchase/Renovation Loans
While Visio Lending only offers landlord loans, Lending One offers great fix ‘n flip options, in addition to landlord loans. If you want to go the hard money loan route, try calling a few local hard money lenders to price them out for short-term renovation loans.
We know you like tables; let’s condense some info for you!
|203K Loan from Bank||Online Flex Lender for Investors|
|Lender Examples||Wells Fargo, US Bank||LendingOne|
|# of Units||1-4||1-4|
|Occupancy||Owner-occupied (house hacking)||Non-owner-occupied|
|Loan to Value (LTV)||90-97.5%||Maximum of 90%|
|Debt-to-Income Ratio (DTI)||31% front-end, 43% back-end||No income docs required|
|Cash Reserve Requirements||3 Months||6 Months per property|
|Loan Points||0-2 (varies by borrower qualifications)||1-2 (varies by borrower qualifications)|
|Closing Costs||Varies by borrower qualifications||$2500+|
|Repayment Term||15-30 Years||12 Months|
|Time to Funding||30-60 Days||10-14 Days|
|Loan Limits||Varies by # of units||$75,000+|
|States Serviced||All||All except: AK, HI, MN, NV, ND, SD, UT & OR|
|Where to Apply||Wells Fargo, US Bank||LendingOne|
If you talk to banks, make sure they lend to legal entities (like LLCs), if you use them to help protect against lawsuits. Many conventional lenders and banks will only lend if the property is owned in your individual name.
Landlord lenders, hard money lenders, and most investment property lenders have no problem with lending to legal entities.
What Types of Lenders Work with Landlords & Investors?
What’s the difference between private money and hard money? How do conventional loan programs differ from community bank portfolio loans?
We’ve got you covered. Here’s a breakdown of the different types of lenders who fund landlords and real estate investors, and the pros and cons of each.
Conventional lenders follow strict loan program guidelines, so they can turn around and sell the loans on the secondary market to large servicing companies like Chase or Wells Fargo.
Pros: There are a lot of cons, but one really big advantage: conventional loans are usually the cheapest loans available to landlords and real estate investors.
Often these loans feature interest rates only one point higher than homeowner loans. Lender fees are also cheaper, usually in the 0.5-2 points range.
Cons: Conventional loans are slow. Plan on at least 30 days to close.
Typically, these conventional loan programs also have tighter credit and income requirements. They’ll also require lots – lots – of documentation and paperwork from the borrower.
Unless you are planning on house hacking, landlords usually need to make a down payment of at least 20%.
Likewise, if you’re not house hacking and using a 203K loan, conventional loans are not good for buy-and-rehab renovation financing.
Lastly, conventional loans report on your credit, and place a cap on the number of mortgages borrowers can have showing on their credit. That cap varies by loan program, but don’t count on having more than four conventional loans at a time. Besides, you don’t want eight mortgages on your credit, chewing up your credit score.
Bottom Line for Landlords & Investors: Conventional lenders are great for house hacking, and potentially for a real estate investor’s first or second rental property.
Online lenders are increasingly becoming a mainstream, go-to funding option for landlord loans and fix-and-flip loans.
Because online lenders keep the loans within their own portfolios, they are far more flexible than the rigid conventional lending programs. They also cost more.
Pros: Faster settlement: online landlord lenders can often settle within 10-14 days.
Less documentation: online lenders often don’t require any income documentation, and focus less on credit history. Their focus lies more on the collateral, the property itself.
They have no limit on the number of mortgages on a borrower’s credit, and many offer more attractive pricing to experienced, proven investors. Often these lenders don’t report payments to the credit bureaus, either.
Online lenders can also handle buy-and-rehab scenarios well. They’ll create a draw schedule with you for the required repairs.
Cons: Online landlord lenders and fix-and-flip lenders are more expensive than banks and conventional lenders.
Expect a down payment of at least 10%, and often in the 20-25% range.
While they are far more flexible than conventional mortgage lenders, they may not be as flexible as a local hard money lender.
Bottom Line for Investors and Landlords: Be sure to vet online lenders carefully, but they can be excellent sources of ongoing funding for real estate investors. Online lenders often represent a nice balance between cost, speed and flexibility. The two best that we’ve found are LendingOne and Visio Lending.
Hard Money Lenders
The line between traditional hard money lenders and online real estate investor lenders has become blurry in recent years.
Hard money lenders are individuals or companies who lend private funds to real estate investors. They can be local, regional, or national. They could have a physical office location, or be completely online nowadays.
Pros: Hard money lenders are fast and flexible. I started my career working for a hard money lender, and we closed a loan in three days once (and charged accordingly).
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Hard money lenders lend largely based on collateral, so credit and income are less important to them than conventional lenders.
They don’t report on borrowers’ credit and have no limits on existing mortgages.
Cons: They are expensive. While some hard money lenders charge as little as 8-9% interest, they can charge 16-18%, too.
And lender fees? Expect a bare minimum of two points, and as high as eight.
Bottom Line for Landlords and Investors: Hard money lenders are great for short-term fix-and-flip loans. Use them when you need to settle lightning fast, and the property needs significant repairs. Don’t use them for long-term landlord loans!
Local Community Banks
I’ve used local community banks successfully in the past for long-term landlord loans. They keep the loans in-house, on their own portfolios, so they’re far more flexible than conventional loan programs.
Pros: Local community banks often don’t report on credit, and have no limits on the numbers of mortgages a borrower can have.
They’re not cheap, but not outrageously expensive, either. Shop their rates against online landlord lenders.
The best community banks are flexible, and may even offer a single “renovation-perm” loan that lets investors buy and renovate a property, then shift into a long-term landlord loan without refinancing first.
Cons: They usually don’t move as quickly as hard money lenders or online mortgage lenders. Expect settlements closer to the traditional 30 days.
And, of course, they’re local. You’re often limited to whatever community banks happen to service your market.
Bottom Line for Real Estate Investors and Landlords: Local community banks can sometimes be a viable alternative to online landlord lenders. Shop their rates in your market, and especially keep an eye out for singular renovation-perm loans.
Private Funds (Friends & Family)
Borrowing privately from friends and family is the holy grail of funding for landlords and real estate investors.
It requires experience, trust, and confidence. That takes time, and it requires a proven track record of success.
Pros: You negotiate your own pricing and terms. That means it could be cheaper than other landlord loans, and you have the ultimate flexibility.
Private funds can also be as fast and flexible as you can raise it!
Cons: You must first establish yourself as a successful real estate investor. Don’t expect to raise $100,000 from friends and family on your second or third real estate deal.
It also comes with more dire consequences for your personal life if disaster strikes and you default. Borrower beware…
Bottom Line for Landlords and Investors: Gradually start accruing more private funds over time from friends and family. Eventually, you may be able to finance entire deals with private money, but in the beginning just use them for help with the down payment or renovation costs.
A Path Forward for Rental Investors
While every real estate investor follows a different path, here’s a sample outline for how a rental investor might finance their first rental properties:
Property 1: House hack a 2-4 unit property with conventional or FHA financing (3.5-5% down).
Property 2: Use either a conventional bank or online landlord lender (10-25% down).
Properties 3-4: If you’re getting more ambitious with the renovations, use either an online buy-and-rehab loan, a community bank loan, or a hard money loan for the purchase and renovation. Then refinance it using an online landlord loan. (Or, if you’re lucky, avoid refinancing altogether with a renovation-perm loan from a community bank.)
Properties 5-8: Start raising some capital from friends and family. Use this to help with the down payment and/or renovation costs. Use either a local community bank or an online landlord loan for long-term financing.
Properties 9+: Try to increasingly use private funds. To free up some of the private funds tied up in your existing portfolio, consider refinancing several of your properties under an umbrella loan to cash out and use the money towards new acquisitions. Use either community banks or online landlord lenders for financing as needed.
Glossary of Landlord Loan Terms
DSCR: Debt service coverage ratio. The ratio between a rental property’s net rental income and the full (PITIA) loan payment. For example, if the net rental income is $1,000, and the monthly loan payment is $800, then the DSCR is 1.25. ($1,000 divided by $800).
DTI: Debt-to-income ratio. There are two ratios used: a front-end ratio, which only looks at the loan’s monthly payment compared to your gross monthly income, and a back-end ratio, which takes all of your debt into account. This is used primarily by traditional banks and lenders, but not used as frequently by landlord lenders.
LTV: Loan-to-value ratio. The percentage that the lender will lend against the value of the property (e.g. a lender who goes up to 75% LTV will lend $75,000 against a $100,000 property).
PITIA: The full monthly mortgage payment, including principal, interest, taxes, insurance and HOA or condo association fees (if any).
Disclaimer: SparkRental may have affiliate relationships with one or more of the resources linked to on this page. While we have vetted these lenders carefully, always make sure you do your own due diligence when evaluating lenders!