Loans for Rental Property: Guide to Borrowing for LTV

For many investors, the most cost-effective way to finance a real estate investment is to seek out loans for rental property. Which loan, however, will give the highest return on investment (ROI)?

In this article, we explain the types of loans for rental property available, their requirements, and the steps to make you the ideal borrower for your preferred lender. 

Table of Contents:

• Best Way to Finance a Rental Property
• Types of Loans for Investment Property
• Investment Property Loan Requirements
• How to Finance Rental Property

Best Way to Finance a Rental Property

Financing a rental property can be a challenge but with the right lending partner, you'll be well on your way to establishing a successful track record as a real estate investor.

Consider the following to determine the best way to finance your specific rental property:

Loan Terms

Rental property loans typically have stricter terms and conditions than a loan for a primary residence. Non-owner-occupied properties have a higher risk of default; thus, higher rates to compensate for that risk. 

When you’re seeking out loans for rental property from different lenders, consider the following: 

• Length of the loan (in months or years)
• Interest rates and origination points
• Loan amount
• Prepayment penalty

By understanding the terms of your contract, you can easily reduce property costs. Shortening the loan period, for example, can save you money in the long run on interest rates.

Loan to Value (LTV)

Mortgage lenders use the loan-to-value (LTV) ratio to determine lending risk. The higher the LTV, the lower your initial down payment and out-of-pocket costs.

The industry standard for LTV is 80%. This means that a borrower can only get a mortgage if they have a 20% down payment, or have 20% equity in their home.

The LTV at Revolution Capital is 90%

The LTV ratio is calculated by dividing the value of a mortgage loan by the appraised value of the collateral property. 

LTV = (Amount of loan) / (Appraised value of the property)

For example, if you're taking out $120,000 on a mortgage for a house that was appraised at $182,000, your LTV is 65%. 

Down Payment

Unlike primary residences, rental properties generally have a higher minimum down payment requirement. The industry standard for rental properties is a 15% – 25% down payment, depending on whether you’re purchasing a one-unit or multiple units. 

Revolution Capital Lending offers the best loans for rental properties with only a 10% down payment

Types of Loans for Investment Property

As we mentioned earlier, rental properties can yield higher revenue if you choose the right investment property loans for your project. We’ve described the types of loans for rental property and financing options below. 

• Private funding for rental property: Private funding, sometimes called hard money loans, is the process of raising money through private investors, who are often companies or individuals. Traditional private lenders offer 80% LTV with 20% down, however, at Revolution, we offer 90% LTV with only a 10% down payment.
  
  Best for: Investors with existing collateral and projects with high-profit margins.

• Term Rentals: Term rental loans are a long-term rental financing option with 30-year loan terms. Generally, these are non-owner-occupied rental loans and can be financed for up to 80% of the property’s as-is value. The cap rate for these loans is determined by the type of tenant, rated vs. non-rated, and corporate vs. finance.

Best for: Investors with rent-ready properties and no external income. 

• Small balance commercial loans: Small balance commercial loans (SBC) loans offer funding for multi-family properties and mixed-use properties. These loans offer a shorter underwriting period and rates starting at 8.49%.
  
  Best for: Investors with stabilized properties.

• Conventional loans for rental property: Conventional mortgages are typically secured through credit unions, banks, and other mortgage companies. Generally, investors can expect a slower approval process and underwriting than their privately funded counterparts. Oftentimes, debt to income ratio (DTI), credit score, and verifiable income requirements are more strict for these types of loans.
  
  Best for: Investors with a significant financial cushion and previous experience.

• Agency Loans: Government-sponsored enterprises, such as Fannie Mae and Freddie Mac, provide agency loans for both residential and commercial properties. Freddie Mac’s program requirements include no more than 10 one – four SFR properties, a minimum credit score of 720, and a fixed-rate, level payment mortgage. Additionally, investors may not be affiliated with the builder, developer, or property seller.

Best for: Investors with very few low-risk properties.