Private Lending for Residential Rental Properties
Long-term rental financing has become a popular offering by many private and hard money lenders that have historically focused on short-term lending. Also known as LTR (long-term rental) loans or DSCR (debt service coverage ratio) loans, these private mortgages are a great solution for investors that buy and hold properties for cash flow.
Although the pricing is slightly higher than banks and conventional lenders, there are several reasons why an investor or broker would seek private financing for these investments.
Private lending is typically much faster than dealing with banks. If you’re on a tight timeline, chances are the loan will fund faster with the non-conventional lender. Most long-term rental loans close in 1 to 3 weeks.
The primary qualification for long-term rental loans is the rental income, and more specifically the DSCR, which stands for debt service coverage ratio. Basically, the lender wants to make sure the property’s rental income will cover the monthly mortgage payments. The lender likely won’t ask for tax returns but they do require a decent credit score, typically no less than 680.
No Seasoning Requirements
Most long-term rental lenders do not require the property to be tenant-occupied for a certain number of months before you can get the loan. In fact, the property doesn’t even need to have a signed lease. It just needs to be move-in ready so that the lender can estimate the market rental rate. Some lenders will require a signed lease agreement, but most private/hard money lenders will fund the loan if the property is vacant and listed on the rental market.
No Portfolio Limits
Many conventional lenders won’t lend if you own more than 4 properties, and some will have a limit of 10. In private lending, there are no limits to how many properties the investor can own. However, the lender may require that title be held as an entity (LLC or Corp) and not as an individual.
Typical Terms & Guidelines for Long-Term Rental Loans
Below are some of the general guidelines for most of the DSCR lenders listed on our platform.
- Loan Amounts: $75,000 to $2,000,000
- Loan-to-Value: Up to 75%
- Loan-to-Purchase: Up to 80% for value-add projects
- Must have 20%+ cash for the purchase
- No lender on our site provides 100% financing for rentals
- Lien Position: 1st only
- Loan Term: Up to 30 years (some lenders offer 5, 7, or 10 year terms)
- Payment Structure: Interest Only
- Interest Rate Range: 6.75% to 8.50%
- Origination Fee: 1 to 4 points
- Minimum Credit Score: 640
Credit Score Requirement
Almost all lenders offering long-term rental loans will require the borrower to have a decent FICO score, typically no less than 640. The lender may not care as much about credit scores for short-term loans, but the long-term loans are typically sold on the secondary market, and that is where the credit requirement comes from.
Long-Term Rental Loan Scenarios
Below are a few scenarios of when a real estate investor may consider getting a long-term loan for their residential rental property.
Purchase, Rehab and Rent
Many real estate investors will buy a house in poor condition, renovate it, and then locate a tenant with a plan of holding on to it as a cash flowing investment. These projects are typically financed with a short-term hard money loan. Once the tenant has signed a lease, the hard money loan can be refinanced and replaced with a 30-year rental loan at a lower interest rate. The maximum loan-to-value is typically 75%, but it could be as high as 80%.
This strategy is commonly known in the real estate investment industry as “BRRRR” which stands for Buy, Rehab, Rent, Refinance, Repeat.
Purchase a Turn-Key Rental
Investors that don’t have any interest in rehabbing a house can purchase a home that is already rented and cash-flowing, commonly known in the real estate investment industry as “turn-key rentals.” There are many real estate investment firms that will do all the dirty work to rehab a property, locate a tenant and manage the property before selling it.
An investor can use a DSCR long-term rental loan to acquire the cash-flowing rental property and hold on to it for many years. Most lenders will require a downpayment of at least 25%.
Cash Out Equity
Real estate investors can tap the equity in one rental home to purchase another house or invest in something else. So long as there is a sufficient amount of equity, the investor can use a private long-term rental loan to get the cash needed.
LTR lenders only offer 1st mortgages, so if there is an existing mortgage, it would have to be refinanced. There is no such thing as a long-term rental 2nd mortgage in private lending. While an investor may be able to get a 2nd mortgage on their rental property, it’s likely not going to have a long term. And the interest rate may be high, so it’s worth exploring a refinance to get the cash out.
Blanket Loan for Multiple Rental Properties
Some private lending firms offer a “blanket loan” secured by multiple rental homes. Also known as rental portfolio loans, this can help investors simplify their financing by consolidating multiple mortgages into one private long-term rental loan. If one property in the portfolio needs to be sold, the lender can do a partial release, and the total loan amount will be reduced.
These blanket loans can be difficult to structure and manage, so it’s not a common offering by private lending companies. Most long-term rental lenders only consider one property. Some will consider up to 10 properties on one loan, and only a few lenders offer blanket loans for a portfolio of more than 10 properties.
Convert Primary Residence to Rental Home
Many homeowners become real estate investors when they are ready to upgrade to a new house. As soon as the previous residence has been rented, a private long-term rental loan can be used to refinance and/or cash out equity.
If the previous residence is used as a 2nd home by the investor, a private lender will not consider it. Even if the home is rented out short-term from time-to-time, it’s still considered a consumer purpose, and private/hard money lenders only offer mortgages for investment purposes.
Investors that operate a short-term rental business on their property may have fewer financing options in private lending. Most lenders that offer long-term rental loans will want there to be an active lease agreement in place. Short-term / vacation rentals may have inconsistent rental income, and this is seen as a higher risk for lenders. If the property is located in a ski resort town or beach city, there may be slow seasons with lower revenue that cannot support the mortgage payment.
That being said, there are some private lenders that will gladly provide a long-term rental loan on a property that is used to operate a short-term rental business. It started becoming a popular loan program in late 2021.
Funded DSCR Rental Loans
RCN Capital, a national direct private lender, funded a $120,000 DSCR long-term rental refinance loan secured by a newly renovated duplex in West Carrollton, OH. The subject property’s value was approximately $160,000 as-is, so the loan-to-value for our first mortgage was 75%. We paid off a previous loan balance of $117,000. The Borrower was a repeat and experienced investor looking to refinance existing debt on a subject property and hold it to a long-term loan. The 2-unit family residence was being leased for $1,035 per month which was below the market rates as per the appraiser’s estimate ($1,400). The Sponsor had good credit with a mid-score of 735 and bank statements that reflected solid liquidity sufficient to meet our reserve requirement. The debt service coverage ratio was 1.25. The fixed interest rate was 7.17%. We charged 2% origination points. The loan term was set at 30 years. This DSCR rental refinance loan was funded in December 2022.
RCN Capital, a national direct private lender, funded a $136,000 DSCR loan for the purchase of a single-family residence in Texas City, Texas. The experienced Borrower was under contract to acquire the subject property for $170,000 with intentions of holding it long-term as a rental/income property. The subject property was appraised for $230,000 as-is and the Collateral Desktop Analysis (CDA) Report confirmed that the value was acceptable, so the real LTV at the time was around 59%. The appraiser estimated the market rent to be $1,850/month which results in a 1.42 DSCR (debt service coverage ratio). RCN Capital funded 80% of the purchase in 1st lien position and the Borrower contributed 20% cash. The Borrower had excellent credit with mid-scores of 788 and bank statements showed evidence of sufficient assets to justify the loan. The fixed interest rate was 6.5% and the loan term was set at 30 years. We charged 3% origination points. The subject property is approximately 1,880 square feet on a 5,280 square foot lot. This DSCR rental purchase loan was funded in October 2022.
DSCR Rental Purchase Loan for 4-Unit Residential Property in Fresno, California
RCN Capital, a national direct private lender, funded a $436,000 loan for the purchase of a 4-unit residential property in Fresno, California. The purchase price was $550,000 which included a $5,000 seller credit. RCN Capital funded 80% of the purchase in 1st lien position, and the Borrower contributed a 20% cash down payment at closing. The Borrower had excellent credit and sufficient liquidity to close this loan, along with 2 years of property management/investment experience. The Appraiser’s estimated combined market rent is $4200/month which resulted in a 1.11 DSCR. The fixed interest rate was 7.14% and the loan term was set at 30 years. We charged 2% origination points. The subject property was in excellent condition and had an approximate square footage of 3,992. It was already fully occupied at the time of funding, although tenants were renting on a month-to-month basis. This DSCR rental property loan was funded in September 2022.
DSCR Rental Purchase Loan for Single Family Rental in Laurel, Maryland
RCN Capital, a national direct private lender, funded a $256,014 loan for the purchase of a single-family residence in Laurel, Maryland, a mostly residential suburban community conveniently located 20 miles from both Washington D.C. and Baltimore. The purchase price was $365,000. RCN Capital funded 70% of the purchase in 1st lien position and the Borrower contributed a 30% cash down payment at closing. The Borrower was an experienced investor looking to purchase and hold a long-term, cash-flowing rental property. They had an average credit with a mid-score of 688 and bank statements that reflected a balance of $592,962.03 in assets/liquidity. The loan was structured and priced in accordance with RCN’s qualification model. The Appraiser’s estimated combined market rent is $2,325/month, which resulted in a 1.10 DSCR. The fixed interest rate was 6.42% and the loan term was set at 30 years. We charged 3% origination points, and the broker earned a $3,200 commission. The property was in good condition with an approximate square footage of 1,520. It was already tenant-occupied at the time of funding. This DSCR rental property loan was funded in September 2022.
I Fund Cities, a direct private lending firm, funded a $167,600 DSCR loan for a single-family rental property in Savannah, Georgia. The loan-to-value was 80%. One of our great broker partners originally referred this borrower over to Caitlin, one of iFC’s super-pro loan officers. This was a repeat borrower who does a lot of her business within a certain proximity, so getting the initial file together for processing was simple. Caitlin had a great appraiser in mind that delivered the report to iFC quickly.
“The borrower submitted a cash offer on this property,” says Caitlin. “She was using a method of ‘cash offer/delayed purchase’ to make the offers she submitted to sellers more attractive. However, she, of course, preferred not to use her own cash. We were initially discussing a ‘delayed purchase,’ which is where the client purchases the property with cash initially, and then we finance the transaction within a short amount of time on the back end.” However, it was going to be more advantageous to the borrower if we could fund the deal before closing. “Closing was 2.5 weeks away,” recalls Caitlin, “so I worked quickly to beat the clock, and close first, preventing her from using her own funds to initially close on the loan.“ Adds Caitlin, “On the front end, I communicated the possibility we would fund with all parties involved with this transaction, so everyone was on the same page.”
This DSCR loan was funded in February 2022.
Key Loan Benefit to Borrower:
Says Caitlin “It was a smooth closing for not one, but two properties the borrower initially thought she would need to use her own cash to close on.
“The closing went well. You are very diligent, responsive, and helpful. Hope we will work together again in the near future…5 stars!”
i Fund Cities (iFC), a direct lender, funded this 30-year fixed mortgage loan for an experienced investor in the on-fire Delray Beach, Florida real estate market who wanted to use the property for short-term rentals. The investor currently has more than a half dozen rental properties in the booming beach town that sits about halfway between West Palm Beach and Fort Lauderdale. The client came to i Fund Cities to fund a property in Delray Beach that he intended to use as a short-term rental. Although some lenders do loan on short-term rentals, the property type is considered more of a risk, and so lender loan criteria tend to be more stringent than a long-term single-family rental loan. In this case, the client was getting resistance from other lenders because the home had the furniture included in the deal. He needed a lender who would loan on a home that was a turnkey short-term rental. i Fund Cities offered the borrower 80% loan-to-value on the appraised value of the property.
Key Loan Benefit to Borrower:
The client acquired a new investment property that will cash flow up to $6,000 a month in short-term rentals.
Says iFC Loan Officer Andrew, “This client told me he was ecstatic to get 80% leverage on his property with no lease (since he was doing short-term rentals) and he was very happy that we closed without changing the originally quoted terms!”