Loans for Rental Property Allow Investors to Leverage Portfolios
When real estate investors use cash or equity to purchase properties, loans for rental property allow them to leverage their portfolios. The interest rates paid on these loans is less than the higher rates of return that these real estate investors can earn if their equity is working in new projects. This is one of the primary reasons that real estate investors take out such loans for rental property.
Another reason that investors use these loans is to buy out equity and replace it with debt is to end costly or troublesome real estate partnerships. For example, a real estate partnership whereby one partner is employing family members to manage the asset may be more costly to the bottom line as this enters a gray area where business and personal matters collide. In this case, the borrower used a loan to buy out the partner and this resulted in an annual cost base on the asset that was far less than before.
The interest rates on loans for rental property can range as low as 6%, to as high as 10%, depending on the various factors involved. Most loans against rental property portfolios require a minimum number of properties, or a minimum portfolio value. For example a real estate investor owns a portfolio of 10 rental properties with a value of $750,000. The properties were purchased with all cash, rehabbed, and then rented. The real estate investor obtains a cash out refinance loan against the portfolio of rental properties to leverage the equity in the portfolio. The investor then uses the funds to purchase additional investment properties.
Because rental properties in a portfolio may be located in different States, loans for rental property are often not available from traditional banking institutions. If these loans are available, real estate investors may not meet credit score requirements of bank loans due to past foreclosures. The most favorable loans of this type, may come from a non bank lender, also called a private money lender. Because the requirements of private money loans are far less than of that of a bank, qualifying for these loans is easier than obtaining a bank loan in some cases. (Here are some more reasons why borrowers may choose private money loans over bank loans). For more information on private money loans for rental property, fill out a short form on our website here.