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
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. That improves your cash flow (see our rental income calculator to run the numbers on a rental property mortgage).
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. You can compare multiple mortgage quotes at Credible* to find the best interest rate and terms.
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%. Consider moving into the property yourself for at least a year, whether in a small multifamily so you can rent out the other unit(s), or as a single-family that you can keep as a rental after you move out. (Pro Tip: For owner-occupied mortgages for house hacking, try Credible*.)
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 Portfolio Lenders
Online lenders are increasingly becoming a mainstream, go-to funding option for rental property 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.
No mortgage limit: They have no limit on the number of rental property 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.
Renovation financing: Online lenders can also handle buy-and-rehab scenarios well. They’ll create a draw schedule with you for the required repairs.
Cons:
Cost: Online landlord lenders and fix-and-flip lenders are more expensive than banks and conventional lenders.
Down payment: Expect a down payment of at least 10%, usually in the 20-30% range. (Although you can try these down payment hacks to put down less!)
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 three best that we’ve found areVisio, New Silver, and Kiavi.
Better yet, have a specialist comparison shop to find you the best interest rate available right now. We love Jason Forman of Forman Loansfor this — he’s the best in the business.
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 could close investment property loans in three days if needed. And we charged accordingly.
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 many as eight.
Bottom Line for Real Estate 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 rental property loans!
Local Community Banks
I’ve used local community banks successfully in the past for long-term landlord loans. They keep their investment property mortgages 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 Investors
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 investment property 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 Borrowers
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.
Is It Hard to Get a Loan for an Investment Property?
It’s definitely harder to get an investment property loan than a homeowner mortgage.
Homebuyers can take advantage of government-subsidized programs like FHA loans to score low-interest financing with a low down payment. But lenders underwrite investment property loans strictly based on risk, and typically require:
- Higher down payments
- Higher cash reserves
- Higher credit scores
- Proof of prior track record (if any) of real estate investing returns
- Proof of market rents (for rental property mortgages)
It helps to build relationships with investment property lenders. The better they know you, the better the loan terms they’ll offer you.
How to Get an Investment Property Loan (90 Seconds)
Wondering how the application process looks and feels?
I’ll walk you through the loan application process on LendingOne in under 90 seconds:
Tips for Financing Investment Properties
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 investment property mortgage. (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 a blanket loan to cash out and use the money towards new acquisitions. Use either community banks or online landlord lenders for financing as needed.
