4 Types of Investment Property Lenders and Their Pros and Cons

Written by Posted On Saturday, 29 April 2017 05:02

Wise consumers know it’s always best to shop around before buying. Impulsive purchases often lead to regret, while considered decisions lead to high-quality results. The same holds true for investment properties. It’s tempting to jump on an attractive opportunity, rushing to partner with a lender so you don’t miss out. But any good investor will tell you there’s so much more to a deal than what you see on the surface.

How lenders treat you, their response times, their depth of knowledge, and their overall industry authority should carry weight in your decision. Investment property lenders who are friendly and accommodating but have little experience in your chosen investment field are not ones with whom you want to work. Many factors influence the health of a lending relationship, and you can only discover those over time.

Your Goals Will Determine Your Lender

Instead of pursuing the first lender who takes an interest, evaluate all potential partners through the lens of the property you want to purchase: What are your investment goals? How long do you want to hold the property? Will you manage it, or will you hire a third-party company to deal with tenants and upkeep?

After you’ve defined your goals, think about where you’ll source your investment funds. The decision to use pretax retirement funds or after-tax personal funds could affect which investment property lenders you approach. Then, you’ll need to decide how to structure the investment and whether you want to hold it under a limited liability company.

Running the scenarios for down payments or potential loan repayments — as well as cash-flow projections — helps lenders determine whether the loan-to-value ratio and cash flow meet their requirements. Having all these numbers in hand when you approach lenders will make the application process more efficient — they won’t need to run them on their ends.

Once you’ve established your goals and organized the numbers, there are several types of lenders from which to choose:

I. Banks insured by the Federal Deposit Insurance Corp.: If you already have a strong relationship with your local bank, you may choose to borrow from there. Working with a lender who can vouch for your reliability is easier than starting from scratch with a company to whom you’re an unknown entity. More often than not, you’ll get the best rates and terms from lenders who already know and trust you.

However, local banks aren’t always the answer. If they don’t offer the type of loan you need or they’ve capped your borrowing abilities, you’ll need to seek financing elsewhere. Your local lender may not be chartered in other states, so keep this in mind if you want to invest in properties outside your region.

You’ll also need to find out the bank’s expectations for financing an investment property. Most mortgages require a 20 percent down payment, but banks sometimes insist on closer to 30 percent if it’s an investment purchase. Make sure you’re well-versed in these guidelines, no matter how familiar you are with the bank’s lending practices in other areas.

II. Mortgage brokers: Mortgage brokers are often well-connected to lenders throughout the country, freeing them from geographical constraints. Because brokers can shop their lending sources for the type of loan a borrower is seeking, they may provide more options than a local bank or individual lender. Because brokers cultivate lender relationships, they’re often able to negotiate special rates and fee reductions on their borrowers’ behalf.

The downside of using a mortgage broker is that he or she acts as a go-between, separating you from the end lender. This means the loan request is in the broker’s hands, and its success is dependent on his or her ability to make a compelling case for the investment. If the broker is unfamiliar with a lender’s requirements (or if communication problems exist between the broker and the end lender), your request will be jeopardized.

III. Specialty lenders: These lenders focus on specific markets or types of loans. They’re a good option if your investment aligns with their niche services. For instance, if you want your IRA to take out a loan, you need to borrow from a lender who provides IRA non-recourse loans. Other specialty lenders may focus on apartments, mini-storages, or NNN-leased national tenanted buildings. Specialty lenders are useful only if you require their particular expertise. If your request falls outside their domains, they likely won’t be helpful.

IV. Private lenders: Private lenders aren’t beholden to the same rules and regulations that bind banks and commercial lenders, making them an attractive financing source. They’re often able to disburse payments faster than conventional lenders, and they can offer more flexible terms. In many cases, geography or property types don’t restrict them, either. Perhaps the most attractive aspect of working with private lenders is access to cash, which can be a game changer when competing for a property.

Unfortunately, most private lenders don’t advertise their services. They connect with borrowers through referrals, making it difficult to track them down without knowing someone who can make an introduction. While some offer more favorable terms than traditional lenders, others may charge higher rates and prepayment penalties or include onerous stipulations in their promissory notes. Be sure to read all the fine print, and enlist an experienced lender or attorney to review it as well.

Choosing an investment property lender can be a lengthy process, but wise investors recognize that the decision is crucial to successful investments. You may start with your local lender but ultimately decide to go with a different type of financing that better aligns with your goals. If you’re meticulous in preparing your request and vetting lenders, you’ll find the best source of funding for maximizing your returns on the investment property.

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Roger St. Pierre

Roger St. Pierre is senior vice president at First Western Federal Savings Bank, one of the nation’s leading brokers of IRA non-recourse loans specializing in customized lending on income-producing properties. Operating since 1979, First Western Federal Savings Bank is committed to honest, no-nonsense customer communication.


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