Building a real estate investment portfolio requires understanding how to choose the right loan for individual projects. The lending market is complex — however, gaining a working understanding of lenders, loan products, rates, terms, eligibility, and down payment requirements is an essential responsibility for any savvy investor.
Here’s a quick review of the different types of mortgage loans to help you successfully navigate this crucial process.
If you’re just beginning your real estate investing journey, let’s start from scratch and talk about some basics. A mortgage loan is a type of loan used to purchase or refinance a home. Homes and real estate properties are expensive; a mortgage loan allows you to make the purchase by paying a certain fraction of money upfront and then financing the remainder over time.
A mortgage loan has a variety of uses and benefits for investors:
Mortgage loans come with a payment schedule and a rate of interest: by taking on the loan, you agree to make monthly payments for as many months or years required to repay the loan amount, plus interest.
The market offers a large variety of financing options, each tailored for different project types. Understanding these types of home loans allows you to choose the one that’s best suited to your project.
Fix & flip loans are ideal for short-term real estate investors to finance the purchase of a distressed property, fix it, and sell it for a higher price. These projects are extremely popular as part of a diversified real estate investment portfolio.
These benefits come at the cost of a higher interest rate. However, you’re still likely getting a better deal compared to other financing solutions.
Real estate projects that are shovel-ready, i.e., only the construction financing is missing, are best serviced by new construction loans. These are streamlined financing solutions structured to help you get the best return on your investment:
New construction loans are an ideal fit for launching new projects without waiting through a long-term lending process.
Financing for single-family homes intended for rent or rental properties with 1-4 units can be accomplished with a single-family loan product. These loans are specifically structured for rental properties and investment purposes and perform better than a conventional mortgage loan. These are an ideal solution if you have:
Some multifamily property situations require a transitional financing solution to “bridge” or get you to a place where the right permanent financing is available. Bridge loans are applicable in situations like:
These are ideal situations to consider a multifamily bridge loan, which can deliver the funding needed to help stabilize your cash flow and move toward a better, permanent solution. Yes, there’s a higher interest rate — however, the short term, usually 6-24 months, with options to extend, allows you to move on quickly when you find a long-term answer.
Large multifamily projects, i.e., those with 5+ units, benefit from tailored multifamily term loan products. These financing options feature access to suitably large loan amounts, longer terms, and underwriting based on property cash flow. For experienced investors with an existing real estate portfolio, there’s often a streamlined appraisal and approval process that’s geared for quick turnaround.
Traditional mortgage lenders typically have limited, non-specialized options for financing that aren’t tuned specifically for the multifamily market. An accelerated process and customized features for multifamily term loan solutions provide investors the flexibility and pace to meet the demands of a competitive sector.
Investors who are further along in their portfolio-building journey can benefit from a mortgage loan solution that goes beyond simple project-by-project performance. Rental portfolio loans can unify different projects and properties within a single lending solution that offers improved performance, less complexity, and better alignment with long-term investment growth goals. Rental portfolio loans can help you:
This is a solution for buy-and-hold rental property investors that is often used to refinance and acquire properties within the same transaction. They are typically reserved for experienced investors with several properties in their portfolio.
If you have a suitably diverse portfolio, any of these loan types could be right for you at one time or another:
Lenders understand that market conditions evolve, and the right choice at one moment may subsequently turn into a sub-optimal strategy. Many of these products have built-in flexibility that provides options to refinance into a better financing solution.
If you want to be a serious real estate investor, you need to understand mortgage loans and the lending process. Making a decision on the right mortgage depends on a number of factors — however, the most important one is to keep in mind your investing goals and choose a financing solution that helps you stay aligned with your long-term plans.
Autor Bio: Aaron Burcell is the Managing Director of Growth & Marketing at Roc360, the parent company of Haus Lending , a lender focused on professional residential real estate investors. Prior leadership positions include CEO of methinks.io, CMO at Loop Media (Loop.tv), VP of Growth at Marcus by Goldman Sachs, VP of Growth at VEVO (JV: YouTube, Sony Music, Universal Music Group). Over his twenty-five year career, Burcell has been an early employee at several successful startups, including Stata Labs (acquired by Yahoo!) and WebTV (acquired by Microsoft).
Mariia serves as editor-in-chief and writer for the Rentberry and Landlord Tips blogs. She covers topics such as landlord-tenant laws, tips and advice for renters, investment opportunities in various cities, and more. She holds a master’s degree in strategic management, and you can find her articles in such publications as Yahoo! Finance, Forbes, Benzinga, and RealEstateAgent.