Quote from @Scott Trench:
There is, however, a small minority of investors who make this work with alternative debt financing of course. The problem is that the debt terms often differ dramatically from 30-year fixed rate mortgages for these properties, and often require much high down payments, higher interest rates, don't have 30-year amortization periods, etc. Again, with some exceptions.
So it is possible, but the vast majority of real estate investors graduate to either commercial/large multifamily, or become passive investors in syndications before they hit that 10 conventional loan mark.
Great summary Scott!
My two cents as a lender.
We speak to and assist hundreds of SFR rental investors every month, many that are BP members, that use alternative debt to buy or refinance SFR rental properties. I want to shed some additional light on "alternative financing" on rental properties, typically called "DSCR Investor Loans" so that this community understands this type of loan in depth:
1) Similar leverage is available (subject to FICO score) on a DSCR loans as Conventional loans on rentals. 80% of Purchase, 80% LTV for Rate/Term Refi, 75% LTV for Cash out. This would not create a much higher down payment.
2) They are offered with 30 yr term, 30 yr fixed rate and 30 yr amortization. And you can structure the loan to be an adjustable rate if you want lower rate & payment now and refinance if rates increase. You can also add a 10 yr interest only component and have the loan amortize over the last 20 years. They also are available as recourse or non-recourse (at lower LTVs) and to foreign nationals.
3) Many investors switch to DSCR loans from conventional before they get 10 conventional loans... Why? No DTI requirement so easer to qualify as you get further along in building your portfolio, less paperwork & quicker closes allows for focusing finding the next deal, buy/borrower in your LLC instead of personal name, no lease in place = no problem. More reasons are listed on this
BP blog post.
4) DSCR loans closed with LLC as borrower do not show up on your credit report.
5) DSCR loans can be on a single property or blanket loan on multiple properties. Buying 50 property portfolio? Can't do that with conventional loan.
5) Although interest rates on DSCR loans have typically been .5 to 1% higher than conventional rates on rental properties, many of the factors in 1-5 above push investors towards the rental property loan created to meet the needs of investors. Here is a link to a
BP blog post on how DSCR loans are structured and priced.
PS - One of the typical underwriting requirements by lenders on small multi-family (5+ Units) is experience managing rentals. Owning and managing SFRs can qualify you to get financing on MFR properties as you grow and expand your real estate business.
- Kevin
