Question on rental loans

[Freddy Hernandez]

Hi all! I'm new to the community and I'm in the knowledge gaining phase of real estate investing. I'm trying to learn BRRRR as best as I can. I have questions on the refinance stage. I understand hard money loans are typically used to buy the property (There's other ways but I'm considering hard money loans at first). These are typically short term loans with higher interest rate. I believe they're expected to be paid off 6-12 months. Once you go through the BRRRR and get to the refinance stage, this is where you refinance and pay off the initial loan. Ideally you should make most of your money back (if not all) with the money left over. Some question I have are the following:

1) Is the cash out refinance usually done with the same lender you did the hard money loan with. Is it common to go to another institution for the refinance?

2) What kind of loan is the refinance typically? Is this more of a conventional type loan?

3)I also see the term rental loan. What is the difference between a rental loan and conventional loan? I was looking at lenders on the BP website and saw one had this for the rental loan description: "RENTAL LOANS: 30-year fixed rate loan on purchase, refinance and cash out refinances. Up to 80% LTV, 30yr interest only, rates start at 3.75%. Quick Closes. No DTI Requirements. Qualify with FICO and DSCR of the property(s)." Sounds a bit similar to a conventional loan but not quite the same to me.

Thanks all in advance!

[Andrew Postell]

@Freddy Hernandez thanks so much for the post.  You've got a pretty good understanding of it already.  I'll answer these one at a time if you don't mind:

1) Is the cash out refinance usually done with the same lender you did the hard money loan with. Is it common to go to another institution for the refinance? - not usually but it is possible.  Usually we work the REFINANCE step with a different lender. Usually, might be something like 90% of the time.  This is because usually a stand alone, permanent lender will have better terms.  Again, not always the case, but usually we use separate lenders. 

2) What kind of loan is the refinance typically? Is this more of a conventional type loan? - yes, it is more of a "conventional" loan. 30 year, fixed rate is what we want.  Now, I want to provide some clarification here. 

Generally speaking there are 2 main types of loans for investors: “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. Sometimes called "DSCR" loans. Sometimes called other things too. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and maybe a prepayment penalty. These loans are easier to get but the terms are different.

But in either case, you can get a 30 year, fixed rate loan on your property. 

3)I also see the term rental loan. What is the difference between a rental loan and conventional loan? - And this is why you are seeing a difference.  Usually a "portfolio" loan won't need income requirements...but the rate is higher.  There's no right or wrong loan here.  One loan will fit you better than the other loan.  It's important to work with lenders that provide BOTH loans.  Or at least talk with enough lenders that can show you both loans.  Not all lenders are created equally but that's why you see a difference in the description.

Hope all of that makes sense.  Thanks!