May 2022 Loan Terms & Types

Private Loan for a Investment Property

As you gain experience as a landlord and establish a track record of success, people you know might want to get on your rental investment gravy train. Private loans from individuals offer an infinite source of funding for seasoned property investors.

These loans from friends and family gives you ultimate flexibility. You negotiate the terms directly with the lender, from points and fees to interest rates to the loan term. Investment property owners may pay higher interest rates, but you may also avoid origination points and junk fees at closing. While that doesn’t improve your monthly cash flow, it still reduces your total borrowing costs. 

If they know and trust you, they may not even pull your credit report. And they likely won’t ask for income documentation either. 

They don’t report on your credit, and you can scale private loans indefinitely.

But if you default, you risk damaging your personal relationships and credibility.

Private Loan Interest Rates: Negotiated between you and your lender.

Pros: 

• • Scalable: no limit on borrowing
  • Don’t report to the credit bureaus
  • Potentially no upfront loan fees or points added to closing costs
  • Allow loans to LLCs and other legal entities 
  • Fast: you can potentially settle immediately
  • No credit requirements
  • No income documentation required
  • Flexible loan term

Cons: 

• • You need to establish a track record of success in your real estate investments before borrowing money from individuals
  • Potential for damaging your credibility and personal relationships

Seller Financing (Owner Financing)

When you borrow money privately, it doesn’t have to be from a friend, family member, or anyone else you know well. Why not borrow from the seller?

While they may not have thought of the idea on their own, many sellers warm to the idea of owner financing after you explain it to them in full. They hold the promissory note, and you make monthly mortgage payments to them on loan terms you negotiate.

Like other types of private financing, everything is negotiable. Many sellers don’t want to hold the note for the next 30 years, so offer them a balloon mortgage. With a balloon loan, you negotiate a earlier deadline for paying off the remaining loan balance. 

Imagine the seller inherits a property outright from a family member but can’t afford to renovate the property. Instead of paying taxes and local fees for a vacant property they can’t live in or rent out, they provide you with owner financing and turn the property into a source of income.

You negotiate a 6% interest rate, with the loan amortized over 30 years, and a five year balloon payment. So you make monthly payments as if it were a 30-year fixed mortgage at 6%, but by the end of five years you need to either sell it or refinance it to pay the owner the rest of their balance in full. 

Private Loan Interest Rates: Negotiated between you and your lender.

Pros: 

• • Scalable: no limit on borrowing
  • Don’t report to the credit bureaus
  • Allow loans to LLCs and other legal entities 
  • Fast: you can potentially settle immediately
  • No credit requirements
  • No income documentation required
  • Flexible loan term

Cons: 

• • Not always available: many sellers aren’t open to owner financing

Final Thoughts

Getting a loan for an investment property can be an overwhelming and tricky business. Novice  real estate investors often don’t know where to start.

House hacking is an excellent springboard into rental property investing. You qualify for a primary residence mortgage, with its low interest rate and high loan-to-value ratio (LTV). But you can still buy a multifamily property, and only have to live there for a year. 

Conventional mortgages also offer low mortgage rates on rental properties. But with strict caps on the number of mortgages on your credit report, these rental property loans aren’t scalable. Once you hit four mortgages, you have to look elsewhere.

If you’re serious about growing your portfolio, you’ll have to get creative in finding loans for investment properties. Consider online portfolio lenders, private lenders, and seller financing, not just traditional mortgages. 

Or better yet, get creative with these clever ways to cover a down payment.♦

What are you seeing among interest rates for investment property loans? Any questions about loan for investment property rates? We’d love to hear your thoughts on loan options below!

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