Best Loans for STR Investment Properties
Real Estate and all that it entails can be overwhelming, trust me, I get it! After being in the industry for several years now, I feel like I am finally starting to have a grasp on it all! For me, obtaining the actual loan was the most complicating - having to wrap my head around this concept - part. But I can now say that I understand it well enough to explain it to all you newbie investors, thanks to a few deals, podcasts like Bigger Pocket Real Estate Rookie and Real Estate Disruptors and of course my fantastic lender Grace ;)
In my journey, I’ve learned that several investment property loans exist and you must choose the one that aligns with your specific investment goals and current market conditions. Below is a list from AirDNA of the best loan types for investment properties, whether you're new to the rental market or looking to expand your portfolio.
DSCR (Debt Service Coverage Ratio)
Measures a properties ability to generate enough cash flow to exceed its debt.
Property qualifies for the loan, rather than the individual.
Key factors: detailed analysis of rental income and expenses, very little local STR regulations and favor those with property management expertise.
Conventional
Borrower needs financial stability ~ minimum credit score of 620+
Not all lenders will cover this type of loan
Min down payment of 20% to avoid additional PMI payment
Hard Money
Typically used to finance one property while preparing to sell another.
Funded by private investors or companies vs traditional banks.
Fast funding process, which yields to quick access to capital.
Key factors: high interest rates and closing costs, short repayment period (usually 6 to 24mos)
FHA (Federal Housing Administration)
Typically designed for primary residence purchases, but can be used for house hacking
House hacking = works for multi-family properties where owner can live in one unit and rent out the other
Investors must occupy the property within 60 days of closing and live there for at least one year before renting it out
Best for: first time investors with lower credit score and down payment
HELOC (Home Equity Line of Credit)
Financial tool that allows investors to borrow equity from one property to pay for another
Line of Credit given and can be drawn from as needed
Key factors: substantial equity in property to qualify, variable interest rate, option to make interest-only payments until established cash flow
As always, consulting with a mortgage professional with expertise in the STR market can be invaluable in navigating these waters and securing a loan that fits one’s investment strategy. Feel free to reach out to me and I can put you in contact with the best of the best!