Let’s face it, if you are going to invest in OKC rental real estate, you almost can’t do without local banks for borrowing money to buy properties.
This article tells you what local bankers have to offer real estate investors while financing rental property. At the end of the article, it gives you some tips about how to initially approach a local lender.
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What is a Local Oklahoma City Lender?
A small local bank is a bank that does business in your local community and is not a national chain like JP Morgan Chase. Their lifeblood is making good real estate loans, so they are looking to do business with real estate investors. Some examples of small local banks include, in no particular order, First Enterprise Bank, First United Bank, Prosperity Bank, Sooner State Bank, Frontier State Bank, Kirkpatrick Bank, Quail Creek Bank, etc. That’s not an exhaustive list. There are many others.
What Types of Loans are offered while Financing Rental Property?
There are a wide variety of loan programs from one bank to the next. You will always have to have skin in the game. You can expect to put at least 20% of the purchase price as a down payment for these types of loans. If your property has some expensive renovation needs on top of the purchase, you will have a bunch of money tied up in the property. That limits your ability to leverage your funds.
However, you can refinance the property once the project is completed. Most banks will require a seasoning time, for most is one year. Alternatively, you could use a credit line to purchase the property and do the renovations. Once the project is completed, you could refinance it. In that case, one year of seasoning should not be required.
Most of these banks will amortize the loans on the residential real estate between ten and fifteen years. It’s tough to get a $100K+ single-family home to cash flow with a 10-year amortization. But there are several lenders that will do fifteen-year amortizations. If you are looking for a 30-year loan, you’ll need to look into mortgage brokers or correspondent lenders.
The commercial loans you will get from a small local bank are written for a 3- to 5-year time frame. You will normally do renewal for the loan when the time frame is elapsing. I’ve never had a case in which a lender has not been willing to rewrite the loan. I wouldn’t be concerned they will call the entire amount due. But even if they did, it would just be a matter of shopping that loan to another bank.
Types of Rental Property Loans
Loans for rental property have slightly higher interest rates and demand larger down payments.
It’s because the lenders find investment property loans riskier compared to a mortgage for an owner-occupied home. And the banks know that if the investment doesn’t go as thought, a borrower is more likely to give the keys back to the bank.
Well, a residential rental property loan can work in favor of real estate investors. A bigger down payment creates a lower loan-to-value (LTV) ratio, with a lower mortgage debt service payment amount. This potentially increases cash flow. Here are the importance of rental cash flow calculator.
There are various options available when funding rental properties using local banks. Go through the types of loans in OKC while financing rental property:
Conventional Bank Loans
If you already own a house, you’re probably familiar with conventional financing. Such loans are offered by mortgage brokers and traditional lenders such as banks and credit unions. The down payment is 20% of the home’s purchase price with conventional financing. However, with an investment property, the lender may need 30% of funds as a down payment.
Your personal credit score and history determine your capability to get accepted for conventional loans. Borrowers must show that they can afford their existing mortgage and the monthly loan payments. This can help you financing for rental property.
A fix-and-flip loan is a short-term loan that permits the borrower to complete the home renovation so it can be put back on the market as soon as possible. Some investors find flipping houses a winning option because it allows them to receive a handful of profits as they don’t have to wait for the rent check each month.
Fix-and-flip loans are hard money loans, as the loan is secured by the property itself. Hard money lenders practice in these kinds of loans.
The advantage of using a hard money loan to finance a house fix and flip is that it’s easier to qualify compared to a conventional loan.
The drawback of a fix-and-flip loan is that it’s expensive. Interest rates for such a loan can go high as 18%. It depends on the lender, and your timeframe for paying it back may be short.
Home Equity Loan
The other types of loan for rental properties are Home Equity Loan. Either a home equity loan, HELOC, or cash-out refinance, any of them is a great way to secure an investment property for the long term.
In most cases, it’s likely to borrow up to 80% of the home’s equity value to use towards the purchase of the next home. There are pros and cons of a Home Equity Loan, depending on the type of loan you choose. Find it here:
Seller financing is also known as owner financing, which is offered by sellers who own property free and clear. The major benefit of owner financing is you can purchase a house with a 10% downpayment. You will get a favorable interest rate for the loan you create. However, you must have a good credit score if you are thinking of financing a rental property.
A good option for investing is when the real estate market is in a down cycle or if any property is difficult to qualify for conventional financing.
Get to know How can you use Owner Financing to create Passive Income.
What do Local Banks look for in a borrower?
You must have good credit to borrow money from a bank to purchase investment properties. That means a credit score in the 720+ range.
You will likely need to have some type of track record in real estate. If you already have a few rental properties, that’s perfect. I tried to start working with local banks right when I first started but was rebuffed. I had to develop a track record of successfully owning and managing rentals before I began working with my first local banker. So, if you are just starting out, you may have to explore other financing avenues.
Here are the simple tips for real estate investment for beginners in Oklahoma
Why would you want to borrow money from a local bank?
The biggest advantages of these loans are the very good interest rates (i.e., 5% to 6% during low-interest rates cycles), and low lending fees (i.e., normally less than 1 point, the cost of a title report, and an inexpensive appraisal). It really is nice when your lender has control at the local level, instead of being subject to the whims of bureaucracy as when you are working with a larger national bank. That makes approvals go faster. It makes projects that have repair issues that would scare off a national lender much more doable.
Another advantage is that local banks will have a limit on the number of properties they finance for you. There is an upper limit when you are working with a mortgage broker or correspondent lender. However, there is an upper total amount they will lend to one individual. It’s a big number, and if you ever get there, don’t worry. There are plenty of other banks that would love your business.
Things to keep in mind while Financing Rental Property with Local Banks
- Get your paperwork together. Put a financial statement together. There are many templates available. Here is one template for a personal financial statement. You’ll also need 2 years of tax returns. And, there will be other items they will want, but this is a good start.
- Get a referral from a current customer. Get a current customer of the banker you want to work with to refer you to the lender. This adds more credibility. And, you will feel more confident that the lender you are contacting can really help you.
- Have a deal in mind. The banker will feel more confident that you aren’t just blowing smoke if you have a deal they can look at. They are used to people contacting them who have a dream of becoming a real estate investor, but will probably never buy a rental property. They don’t really want you to waster their time talking in hypotheticals.
FAQs on Financing Rental Property In Oklahoma
What is the best way to finance a rental property?
There are various ways to finance your rental property. You can make a Down Payment, prepare your paperwork. Maintain your credit score. For that, you can regularly monitor your credit score, always make your payments on time, and try to handle any errors as soon as possible.
How do I finance my first rental property?
Here are the steps to follow while you are planning to finance your first rental property:
1. Try to Make a Down Payment.
2. Consider Paying Down Debt First.
3. Maintain Good Credit.
4. Consider a Fixed-Rate Mortgage.
5. Prepare Your Paper files and documents.
6. Buy As an Owner Occupant.
7. Obtain a Home Equity Line of Credit.
8. Use the Proceeds From a Cash-Out Refinance.
Do banks give loans for a rental property?
Yes. There are 3 types of loans for rental property. They are conventional bank loans, hard money loans, and home equity loans. There are specific criteria that borrowers need to be able to meet.
What types of loans are offered?
There are three types of loans for financing a rental property. They are:
1. Conventional Bank Loans
2. Fix-and-Flip Loans
3. Tapping Home Equity Loans