With rising home values and strong demand in many markets across the country, real estate investors are shifting their strategy for building long-term wealth from fix-and-flip to Buy, Rehab, Rent, Refinance and Repeat (BRRRR).
The first step to any successful BRRRR investment is getting the financing you need to transition out of a short-term rehab or fix-and-flip loan. Refinancing with a 30-year fixed rate mortgage is an ideal solution, offering lower interest rates and the payment terms that allow investors to keep existing rental properties and continue to purchase new ones.
The Downside Of Bank Financing
The only problem is that getting a qualified 30-year mortgage on an investment home from a bank isn’t always easy. A bank wants to ensure that your loan is secured with your personal income, even if you already have rental income that offsets your payments on the loan.
When it comes to a traditional bank mortgage, your W2 income is everything. That’s why bank loan officers review your income, assets, tax returns, credit history, debt-to-income ratios (DTI) and other documentation, and why they’re less likely to approve your loan if you’re newly self-employed or have inconsistent income.
Another disadvantage to traditional bank loans is how much time it takes to close. Traditional bank loans can take 3 to 4 months, which can put a real estate investor in a bind as they move from a short-term renovation loan to conventional long-term financing.
Loans Catering To Real Estate Investors
That’s where a non-qualifying 30-Year Fixed Rate Loan comes in. This loan offers several advantages to help BRRRR investors acquire, hold and rent residential properties.
A Non-QM 30-Year loan is similar in many ways to a conventional 30-year mortgage from a bank. It’s fully amortized like a 30-year bank loan, with no balloon payments at the end of the loan.
But unlike a bank, the lender uses only a few criteria to determine your eligibility: the loan to value ratio (LTV), comparable rental property income, the borrower’s credit score, and reasonable cash reserves on hand to take care of unforeseen maintenance needs. No income verification is necessary. Since the loan is secured by the value of the property, including the potential rental income the property will generate, these products are ideal for real estate investors. A bank is strictly focused on your personal financial resources as a guarantee for your loan, regardless of how much rental income the property brings in.
While banks offer slightly lower interest rates, that doesn’t help you if you can’t get the loan. Non-QM loans can offer competitive interest rates, with some currently available starting at 5.5%, with a maximum loan-to-value of 80% for rate-and-term refinances (75% Loan-To-Value for cash-out refinances). As of the date of this article, some of these loans are closing in as little as 3 to 4 weeks on average, much faster than the 3 to 4 months that a traditional mortgage takes.
A few additional differences make a Non-QM 30-Year Fixed Rate Loan a smart choice for investors. First, securing financing through an asset-based lender instead of a bank means that your new investment property mortgage will not be reflected on your credit report, so your debt-to-income ratio isn’t negatively impacted.
Some lenders can also issue these loans to business entities, including LLCs and corporations, while most banks will only lend to individuals.
Perhaps one of the biggest advantages of working with a reputable private money lender is that they understand the unique needs of the real estate investor. Because they cater to this market, they understand the business model, the goals and the conditions real investors need to be successful. The best lenders act as a resource to borrowers, with loan originators who provide insight and guidance as they walk through the process with you, helping you make the best financing choice for your situation. This kind of lender is focused on creating a long-term relationship with investors who are building their real estate portfolios.
Your success in building a rental portfolio comes down to the financing you’re able to secure.
If you plan to buy an investment property anytime in the next 12 months, now is a good time to start interviewing prospective lending partners.
Key Lessons For Real Estate Investors
- After using a short-term loan to purchase and renovate a property for use as a rental, refinancing into a Non-QM 30-Year Fixed Rate Loan is an excellent long-term wealth building strategy.
- For many private money lenders, the most important criteria for their loans are: 1) loan- to-value ratio, 2) what comparable rental properties are renting for in the area, 3) the borrower’s credit score, and 4) having some cash reserves on hand to take care of unforeseen maintenance needs.
- Closing a loan with a private money lender can take as little as 3-4 weeks instead of 3-4 months with most banks.
- Currently some 30-Year loans offer interest rates as low as 5.5%, with 80% Loan-to-Value ratio (up to 75% LTV for cash-out refinance).
- Get a reputable hard money lender on your team well in advance of purchasing an investment property.
