period for the property to determine whether the buydown of the rate makes sense.
SINGLE OR PORTFOLIO RENTAL LOAN When a borrower has multiple rental properties, they may need to determine whether it’s better to finance them all as single-property loans or group them into a blanket portfolio loan. Lenders offering blanket or portfolio loans generally provide release provisions for paying off a single rental property from the pool. This allows a property to be released from the loan obligation. Typically, lenders are requiring 120% of that property’s associated loan amount, within the pool, to discharge it from the group.
LONGERVS. SHORTER PREPAYMENT PENALTIES
Your holding period is an important consideration when determining a prepayment penalty period a borrower is comfortable with. A prepayment penalty is calculated based on a percentage of the outstanding loan balance. Prepayment penalties generally range from three to five years. A borrower’s selection can improve or worsen the interest rate or fees for a rental loan. The most quoted prepayment penalties are 5% for five years and the five-year step-down prepay penalty. The step-down prepayment, or “54321,” is a penalty that starts at 5% for the first year, and then declines by 1% each subsequent year until it expires at the beginning the sixth year of the loan. Most lenders offer options to shorten, extend, or change the prepayment penalty period to fit your investment strat - egy. This allows you to pay a higher rate or fee to shorten the prepay penalty period to as little as one year. Inves - tors can consider this option as opposed to a short-term bridge loan for properties they plan to sell in the next one to three years. In many cases, the rates for a long-term loan, with the shortening of the prepayment penalty, is superior to the standard bridge loan. Additionally, several lenders offer seven-year pre- payment penalty options. These options can reduce the rate or fees for a loan and make sense if you plan on a very long-term hold. INTEREST ONLYORAMORTIZING LOAN “Interest only” means the monthly payment is only the interest accrued for the loan. Lenders frequently offer either a five- or 10-year interest-only phase followed by a shortened amortized period. Investors with a short-term hold horizon can consider this option. Since there isn’t a large principal paydown created in the first five years of a 30-year amortizing loan, this strategy can maximize cash flows and capture property appreciation during the hold period. Many borrowers with a long-term hold horizon select the amortizing loan structure, with the intent to let their renters’ monthly rent payments pay down the loan balance for them.
EXAMPLE PropertyValue: $100,000
Property Associated Loan Amount: 70% LTV = $70,000 Cost Required to Release (120% x $70,000) = $84,000 Therefore, an extra $14,000 is deducted from the prop- erty sale proceeds, which the lender will use to reduce the principal balance of the existing loan. Importantly, this isn’t a prepayment penalty since the additional funds are used to pay down the current loan. An alternative option is to use individual loans on each property. Lenders may have an underwriting fee of $500 to $1,500 per property. If you have five or fewer properties to finance, it could make sense to pursue individual loans and work to negotiate a discounted underwriting fee. When designing a rental loan, it is important to investi- gate your loan options and better support your investment strategies. Be careful to connect with a trusted broker or lender that has these possibilities available. A great finance partner can help you save time and money—and increase your profitability. •
Damon Riehl is the founder and CEO of Investment Property Loan Exchange. He has more than 35 years of lending experience in a broad array of asset classes, including commercial and residential
mortgage, small business, and construction lending. Riehl held top leadership positions as head of commercial lending for Ocwen Mortgage, head of unsecured lending for Citibank, global mortgage leader for GE Capital, and head of construction products at Fannie Mae. He is a member of the Harvard Joint Centers for Housing Studies. Riehl has built six de novo lending platforms and used that knowledge to build and grow Investment Property Loan Exchange and the FinTech platform LoanBidz.com.
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