Insula Capital Group

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A Complete Guide to Rental Property Loans

Are you considering investing in rental properties? Well, hold on! Before you get down to investing, you must get your finances in order. If you’re looking for ways to finance your rental property investment, you can secure it through residential rental property loans.

Clueless about what these loans are? Let’s find out!

What Is a Residential Rental Property Loan?

A rental property loan is a type of rental investment loan issued by a single-family residence (SFR) in use by a tenant and not the owner. The property should be prepared to rent to qualify for the loan. Moreover, rental property loans are also apt for short-term rentals, like vacation rentals.

How Do Rental Property Loans Work?

Residential rental property loans, on average, have higher interest rates and demand significant  down payments. Rental property loans are completely amortized over 30 years, which means the payment is consistent each month, making it easy to put together an accurate cash flow pro forma.

Investment property loans are considered riskier than a mortgage for a primary residence according to the lender, which is why interest rates are higher and down payments are larger.

The minor restrictive conditions on a rental property loan can work to the real estate investor’s benefit. Investors can expense interest payments as a tax deduction. A larger down payment lowers the loan-to-value (LTV) ratio, resulting in a reduced mortgage debt service payment and maybe more cash flow.

What Qualifies As an Investment Property?

House props

An investment property is a normal real estate property purchased to generate capital, usually by renting it out to tenants. 1-4 unit SFRs, condominiums, and townhomes are examples of investment properties that qualify for rental property loans.

Rental Property Loans vs. Conventional Home Loans

In some ways, rental property and conventional home loans are quite similar. For instance, both require borrowers and interested candidates to fill an application. Sure, the application can vary in terms of documentation but the rest of the process can be the same. But what are the differences between the two? Let’s find out!

Higher Interest Rates

Rental property loans often have higher interest rates and costs. They should be 100 to 400 basis points more than for an owner-occupied home. One-tenth of a percent is equivalent to each basis point. So, if a home loan is 4.5 percent, a rental property loan to the same borrower would be 5.5 percent or more.

Higher Reserve Requirements

Be prepared to confirm that you have liquid financial reserves equivalent to your down payment and closing fees, as well as 6-12 months’ worth of monthly principal, taxes, interest insurance, and any additional dues. Some lenders may demand you demonstrate reserves on all of your funded rental properties, especially if you own more than one.


When applying for your loan, your professional account and income is probably significant to a lender, so you’re likely to show pay stubs and tax returns. The lender will most likely ask you to prove that you’re employed at the same position you were when you took the loan before closing.

You’ll be asked for all of this information and more for various forms of rental property loans, especially if you already own other rental properties. Instead of concentrating on your employment and earnings, the lender will emphasize the rental property cash flow for other forms of rental loans—this considerably simplifies documentation.

Pros of Rental Properties

Rental property loans are highly popular as the offer the benefit of owning rental properties. Let’s explore these benefits.

Tax Benefits

Rental properties offer many tax deductions provided by the Internal Revenue Service. The categories include:

  • Regular and essential expenses
  • Depreciation
  • Renovations

This means you can withhold your maintenance costs, insurance, property wear and tear, and mortgage interest. Depreciation can lead to a nominal loss that you can deduct from other income. In simpler words, you may attain a positive cash flow from rental income excluding expenses yet have a net loss for tax purposes. However, remember that depreciation can decrease the basic property costs when calculating capital gains when you sell it.

Moreover, the 2017 Tax Cuts and Jobs Act provides landlords with a range of tax benefits. If you’re the owner of a flow-through entity (also referred to as a pass-through business) and manage it as an individual proprietorship, partnership, limited liability company, or S corporation, you’re free to deduct 20% of your net rental income. Not everyone is suitable to be a landlord, so make sure you’re ready to deal with everything you’ll face, from late or unpaid rent to tenants who cause damage to your home before you plunge in.

Seasonal Rentals

Another advantage of rental properties is if you invest in seasonal rentals, you can still deduct your expenses if you use it for 10% of the rented days at a reasonable market price or 14 days each year.

1031 Exchange

According to the 1031 exchange, individuals can sell their rental property and invest in a similar property without the hassle of paying any capital gain taxes.

Renting Extra Space

You can also treat a room or portion of your homes like a rental, deducting a percentage of the mortgage interest and other expenses from the revenue. However, you should be aware of the potential hazards of renting out extra space, such as local zoning regulations.

Cons of Rental Properties

Sure, rental properties can be highly profitable but they also have some drawbacks such as:

Lack of Liquidity

Real estate properties aren’t a liquid asset. Even in the peak market, completing a deal can take several months. And if you have to sell quickly due to an emergency or some unforeseen circumstance, you could not get the greatest price.

Rising Taxes and Insurance Premiums

Your mortgage’s interest and the terms may be fixed, but there’s no assurance that taxes won’t rise quicker than your rents. Premiums for insurance may potentially rise, as they did in the aftermath of natural disasters.

Neighborhood Decline

Ideally, your investment property will thrive among other well-kept homes, and local amenities will improve. Therefore, your cash flow will continuously increase while your costs remain consistent. However, neighborhoods change over time, and your investment may devalue. Just as you would pay attention to local politics where you live, you should pay attention to where you invest too. You can easily reduce your exposure through some due diligence.

Unusual Considerations

It’s critical to examine mortgage interest rates when purchasing a primary residence or a rental property, regardless of whether you’re buying a primary residence or a rental property. Low fixed-rate mortgage debt is generally a strong inflation evade. Periodic rent augments are a technique for landlords to offset inflationary increases in property upkeep costs.

In August 2021, the interest rate on a 30-year fixed mortgage was 2.875 percent. Over the last 50 years, mortgage rates have averaged roughly 8%. While these rates are appealing, keep in mind that mortgage rates for investment houses are often higher than those for primary residences.

Tips for Rental Property Loans

Rental property loans can be a smart move, but only if you make the right choice. That’s why we’ve prepared a list of some effective tips for your rental property loans.

Choose the Accurate Down Payment Size

When planning, plan at a 20% down payment. Down payments can vary from lender to lender, so make sure you do a thorough check to select the right down payment terms for your loan.

Make Sure You’re Financially Stable

Apart from aiming for a substantial down payment, plan well so you’re financially stable; make sure you at least have a liquid cash reserve for the next 6 to 12 months. This is can be valuable in the long run and ensure you don’t lose your property due to any non-payments and foreclosure.

Improve Your Credit Score

Undoubtedly, every lender has their terms and condition on all loans, and rental property loans aren’t any different. Lenders will vary in terms of pricing, conditions, etc. So make sure you’re prepared to meet those requirements before you apply for a loan. That’s why opt for strategies and techniques to improve your credit score.

Prove Qualifying Income

Whenever you apply for any loan, you need supporting documents to prove you qualify for it. This applies to both private lenders and traditional lenders such as banks. So, make sure when you’re applying for your rental property loan, you collect your documents. Moreover, you’ll need your tax returns with the schedules plus pay stubs.

Be prepared to answer queries regarding your previous tax return. In addition, ensure you have enough income, including any net operational income from your rental properties, to cover your rental property’s monthly payment.

Ensure the Property is Ready to Rent Out

Remember, construction loans are different from rental loans and are secured to finance home repairs and renovation. Before you rent your property out, you need to make sure it’s ready to be rented, meaning it should be suitable for living. Therefore, make sure you fix up any damage to ensure it’s rent-ready.

Types of Rental Property Loan

There are various types of rental property loans that you can choose from. Most lenders offer several rental property loan choices so that borrowers can choose the one that meets their  requirements. Here are some rental property loan types:

Conventional Loans

Most individuals are familiar with conventional or conforming loans. Traditional lenders, such as banks and credit unions, offer conventional loans.  Moreover, private lenders also offer conventional loans. If you have a decent credit score, interest rates are usually lesser than other alternatives, and down payments are often less than 25%. Conforming loans must meet the requirements of Fannie Mae or Freddie Mac. While Fannie Mae and Freddie Mac enable a borrower to have up to ten mortgages, banks typically have a four-loan maximum.

Hard Money Loan

Private investors generally provide hard money loans, which use your assets as collateral. These loans are less restrictive than mortgages because they aren’t issued by a bank. Plus, they’re comparatively easier to qualify for than other types of property loans, and they’re approved quickly. Moreover, these loan types are a terrific method to tackle the competitive real estate market because the entire procedure can take a maximum of 1 week. You can generally qualify for a loan if you can put down a 25-30% down payment.

However, these types of loans are short-term that must be repaid within 1-5 years. Hard money loan is most commonly used for property investments that are intended to be fixed and flipped as quickly as possible. This loan is perfect for buying rental homes, but you’ll need to refinance as quickly as feasible.

Blanket Loans

A blanket loan is a suitable alternative for real estate investors who want to buy multiple rental properties and finance them all with one loan or refinance a portfolio of on-hand rental properties. Private lenders and mortgage brokers are two options for obtaining a blanket mortgage loan for any form of income-generating property.

Interest rates, loan lengths, credit scores, and down payments vary from lender to lender, and loan conditions can often be tailored to match the borrower’s and lender’s demands. In a blanket loan, rental properties are frequently cross-collateralized, which implies that each property acts as collateral for the others. However, you can request a release clause, which permits you to sell one or more of the properties covered by the blanket loan without having to refinance the others.

Secure a Residential Rental Property Loan with Insula Capital Group!

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If you’re considering securing residential rental property loans and looking for a reliable lender, let Insula Capital Group help you.

Insula Capital Group is a leading private lending company, offering reliable and wide-ranging residential rental property loans, hard money loans, fix and flip financing, and more. The real estate investment company’s fix and flip financing options are suitable for all real estate projects, including buy and hold, land development, new construction, etc.

Reach out to them right away to secure your rental property loans.