Long-Term Rental Loans

Real estate investing has long been among the most lucrative ways to build wealth over time. While there are several strategies available in this realm, few offer stability and scalability like long-term rentals. But purchasing real estate requires a ton of capital, something that many would-be investors don’t have enough of to cover the cost of an investment property.

Fortunately, long-term rental loans are available for the specific purpose of helping investors finance rental properties.

This guide explores what long-term rental loans are, how they work, who they’re for, and how they differ from traditional mortgages.

What Are Long-Term Rental Loans?

Long-term rental loans are mortgages used to finance residential investment properties that are rented out for extended periods. These loan types should be differentiated from short-term rental loans, which are geared more toward vacation properties that are rented out for much shorter periods, usually on a nightly or weekly basis.

In particular, long-term rental loans are designed for buy-and-hold investors who generate steady rental income from tenants and build equity and wealth over time.

Key Features of Long-Term Rental Loans

Long-term rental loans are characterized by the following features:

Who Are Long-Term Rental Loans Suitable For?

These loan types are ideal for:

• Buy-and-hold investors looking to generate passive rental income
• Self-employed borrowers with complex finances
• Real estate investors scaling their rental portfolios
• Entrepreneurs looking to buy under an LLC or corporation

How to Qualify

While requirements vary by lender, here’s what you’ll typically need:

• Credit Score: Most lenders require a minimum score of 620+. Higher scores unlock better rates and terms.
• Down Payment: Expect to put down 20% to 25% for investment properties. Some lenders may allow lower down payments with mortgage insurance.
• Rental Income: Depending on the specifics of your loan, you may have to show the lender proof that the property generates enough income to cover the mortgage.
• Property Condition: The property must be rent-ready and not require any major repairs. Some lenders may require an appraisal or inspection.
• Entity Structure: Many lenders allow you to borrow under an LLC or corporation.

Tips for Success

To boost your odds of loan approval to finance a long-term rental property, consider these tips:

• Work with an investor-friendly lender: Not all lenders are well-versed in rental property financing. Look for one that specializes in these types of loans.
• Maintain good credit: Make timely bill payments, pay down debts, and monitor your credit score to secure better terms.
• Keep detailed rental income records: Showing signed leases, rent receipts, or market rent estimates can strengthen your loan application.
• Use an LLC: Consider borrowing under a business entity for personal asset protection.
• Plan for sufficient cash reserves: Many lenders require 3 to 6 months of mortgage payments in reserves to ensure you can cover bills during times of vacancy.

Pros and Cons of Long-Term Rental Loans

Given the financial commitment involved, it’s worth it to consider the benefits and potential drawbacks of long-term rental mortgages before applying:

Pros:

• Long repayment terms: Long-term rental loans typically offer 15- to 30-year terms, which means you can spread out your payments over decades. This reduces monthly obligations and improves cash flow, making it easier to hold onto properties over the long-term, even during downturns in the market.
• Predictable payments: With fixed-rate loans, principal and interest payments remain the same month after month, offering predictability for budgeting and cash flow planning.
• No personal income verification (for DSCR loans): Depending on the specifics of the loan, you may be able to qualify based only on the rental income collected on the property, and not personal income.
• Scalable for portfolio growth: Long-term rental loans are designed with scalability in mind, making it easier to build a rental portfolio without hitting financing roadblocks.
• Tax-deductible interest and depreciation: Rental property owners can deduct mortgage interest, depreciation of the building, and operating expenses. These deductions can significantly reduce your taxable income.

Cons:

• Higher down payments: Long-term rental loans may require a higher down payment, often 20% to 30% of the purchase price.
• Higher interest rates: Expect to pay slightly higher interest compared to owner-occupied loans. This is because lenders price in the added risk of vacancy, tenant issues, and market volatility.
• Limited lender availability: Not all lenders offer non-traditional investment loans.  As such, you’ll need to shop around or work with a mortgage company with access to investor-friendly loans.
• Cash reserves may be required: Many lenders require 3 to 6 months of reserves, which means you must show enough liquid assets to cover several months of mortgage payments.

Long-Term Rental Loans vs. Short-Term Rental Loans

Both long- and short-term rental loans are available for investment properties, but serve different purposes:

FAQs

• Are long-term rental loans scalable for building a portfolio?

Yes, depending on the specific loan structure, these loans are especially useful for investors.

• What qualifies as a long-term rental property?

A long-term rental property is typically leased to tenants for at least 12 months. Properties used for short-term rentals, like Airbnb or VRBO properties, generally require different financing; namely, short-term rental loans.

• Can I get a long-term rental loan as a first-time investor?

Yes, many lenders work with first-time investors. That said, you’ll need strong credit, sufficient cash reserves, and a hefty down payment.

• What’s the difference between a conventional investment loan and a long-term rental loan?

A long-term rental loan can include non-QM and DSCR options that don’t require personal income. On the other hand, a conventional loan follows Fannie Mae/Freddie Mac guidelines and requires full income documentation.

• Can I refinance a primary residence into a long-term rental loan?

Yes, you can convert your primary residence into a rental and refinance it as a non-owner-occupied property. However, it will be subject to investment loan guidelines.

• What are some common challenges with these loans?

Challenges include stricter qualification (stronger credit score, higher down payment, and reserve requirements), and higher interest rates.

Final Thoughts

Many real estate investors rely on long-term rental loans to fund their investments. These loans offer the structure, flexibility, and scalability that buy-and-hold investors need to build wealth. Whether you’re financing your first investment property or are looking to add more properties to your portfolio, the right loan can make all the difference.

Need Financing for an Investment Property?

If you’re looking to purchase an investment property in the Pacific Northwest region, we can help. At Sammamish Mortgage, we offer various mortgage home loan programs suitable for investors in WA, OR, ID, CO, and CA. Visit our website to get an instant rate quote, or get in touch with us today to have your mortgage questions answered!