A rental loan, often referred to as a buy-and-hold loan, is a type of financing specifically designed for real estate investors who intend to purchase a property and hold it as a rental for income generation, rather than flipping it for a quick profit. This type of loan helps investors acquire properties that they plan to rent out long-term, whether for residential or commercial purposes.
Key Features of a Rental Loan:
Long-Term Financing: Unlike fix-and-flip loans, rental loans are generally long-term loans, often with terms ranging from 15 to 30 years. This allows investors to hold the property for an extended period while collecting rental income.
Stable Interest Rates: Rental loans typically offer more stable interest rates compared to short-term loans. Investors benefit from predictable monthly payments, especially if they opt for fixed-rate loans.
Property-Based Evaluation: Similar to other real estate loans, rental loans are primarily evaluated based on the property’s value and its income-producing potential (rental income), rather than the borrower’s creditworthiness alone.
Down Payment Requirements: Rental loans typically require a larger down payment compared to primary residence loans. Depending on the lender and the property type, this could range from 15% to 30% of the property’s purchase price.
Loan-to-Value (LTV) Ratio: Lenders usually offer rental loans with a loan-to-value ratio (LTV) of around 75-80%, meaning the borrower needs to contribute 20-25% as a down payment.
Cash Flow Consideration: Lenders often assess the property’s ability to generate rental income to ensure that it can cover the mortgage payments, taxes, insurance, and maintenance costs. Investors must demonstrate that the rental property will be profitable.
