How to determine if this type of loan is right for you
One of the most important aspects when it comes to real estate investments is picking the right loan program for yourself and the property. Each lender will offer multiple programs so navigating through the different options and choosing the right one is essential. Don’t be afraid to ask a representative from the lender of your choice. They should have plenty of information regarding the products and will answer any questions about guidelines or requirements for each of the different loan programs.
At RCN specifically, the loan program that has seen the biggest increase in popularity over the last year is the long-term rental loan. Typically, a 30-year loan program, the long-term rental is the best option for real estate investors seeking passive income. With the long-term rental, there are plenty of factors that will work in an investor’s favor and make the loan program more appealing. The property must be in rent-ready condition and the interest rate for this particular program will be the lowest of any program that a lender or bank will offer. Having that lowest interest rate for the longest period makes the long-term rental loan very appealing. Currently at RCN Capital, the interest rate is 3.49%.
However, you still must make sure that this specific loan is right for you. Just because it has the lowest interest rate for the longest time frame doesn’t mean it is always the best for you and your investment plans.
As mentioned earlier, the 30-year loan program is typically a scenario where the lender will not allocate any rehab funds. On a long-term loan having that property ready to be rented out to tenants is a big plus for the lender and minimizes the risk on their end. If as an investor, you know your ultimate plans are to make some renovations on the property and turn a real profit, the long-term rental loan might not be for you initially. On the other hand, one of the most popular times to take a long-term loan is to refinance after a fix and flip loan is completed. This way, you have increased the value of the home through renovations and the amount you can charge for rent. With the security of a 30-year loan and the value of a better property, a lot of borrowers will buy the property, perform the necessary rehab and then take out the long-term loan when it is precisely right for them to do so.
Another thing to consider with certain lenders when determining if the long-term loan is right for you is how long you want to hold on to the property for. On long-term loans, a pre-penalty penalty can come into play. It can differ from lender to lender, but for RCN Capital, the pre-payment penalty period is for the first five years of the 30-year loan. This will only come into play if you want to get rid of the property in the first five years after taking out a loan. Be sure the long-term rental loan is what you want so you can avoid paying unnecessary fees and lose out on a money-making opportunity. There are always alternatives such as the short-term rental and the fix and flip loan product as well. There is no doubt that there are advantages to the long-term rental but it’s also a big commitment. If you are ready to hold on to the property and make it a rental that serves as passive income than the long-term rental is right for you.
For long-term rentals, meeting the necessary guidelines for you to qualify for the loan will also let you know if the long-term loan is right for you. Certain lenders need to see experience and a minimum FICO score so as an investor it is important to keep tabs on what the number is at all times so you can be sure you’ll qualify. You can save yourself a lot of time by being on top of those certain things to know when it is worth applying or not. At RCN Capital, for 1-4 unit properties, the minimum FICO score is 620, however if you are looking for a long-term rental loan on a multifamily property (5+ units) then you will need a FICO score of at least 680. A partner can be brought in with a FICO score that meets those minimum requirements if you yourself do not, but they will have to sign on the loan and be a co-guarantor.
One of the last important aspects of determining whether the long-term rental loan is right for you is deciding what kind of investor you want to be. There are two main choices as you can go the short-term route with fix and flips and making quick cash post-renovation by putting it back on the market or you can be more of a landlord, be invested in tenants and relationships with them while accruing the passive income over a long period of time. If you prefer the latter than the long-term rental loan would be a strategy that is perfect for you. Acting as a landlord and making sure all your units have tenants, and the tenants are provided for when necessary is all part of the long-term rental strategy. It is less labor intensive but there is still work that needs to be done for those rental properties.
Long-term rental properties have so many advantages, but it is a must that investors do their due diligence and find out if the long-term loan is right for them. For any questions on long-term rental loans or any general questions regarding real estate investment properties, don’t hesitate to reach out to RCN Capital!
Nate Zielinski, Junior Business Development Coordinator, joined RCN Capital in 2020. He adds his ambition, communication skills, teamwork, and public speaking ability to RCN’s Business Development team. Nate’s goal will be to recruit new, long-lasting business relationships with brokers and borrowers as well as maintain the strong relationships RCN Capital already has in place. Nate’s prior work experience includes sales, advertisement, copywriting, and social media. Nate graduated from the University of Connecticut in 2015 with a Journalism degree.