Demand for affordable housing remains high, which is good news for single-family real estate investors across America. As the single-family rental (SFR) industry continues to mature and become more institutional across the board, many investors are opting to keep their flips as rental properties.
The steps to fix-and-flip and fix-and-hold are similar, but there are important things to consider as you build a rental portfolio. You’ll want to answer some strategic questions on your journey to building long-term wealth.
Should I Choose a Fixed or Adjustable Rate?
After nine consecutive rate hikes by the Federal Reserve since March 2022 and a Fed Funds rate over 5%, every investor in America is acutely aware of interest rates and the impact they can have on their investment. For the SFR investor looking for the right financing solution for a rental property, there are two options: a mid-term or long-term approach.
The mid-term solution comes in the form of a 5, 7, or 10-year interest-only, adjustable-rate mortgage (ARM). The benefits of a mid-term solution are two-fold:
- You only pay interest on the principal balance of the loan, which means cashflow is higher than that of a fully amortizing loan, and
- You have a window of time to assess long-term interest rates and plan for the day when you ultimately lock in a long-term 15 or 30-year financing solution. The risk of an ARM is that long-term interest rates move higher than your existing interest rate during the 5, 7 or 10-year window and you get stuck in a negative leverage situation.
The long-term solution comes in the form of a 15 or 30-year fully amortizing, fixed rate mortgage. The benefits of the long-term solution are also two-fold:
- You have certainty of what your mortgage payment will be over the long-term, regardless of what happens in the interest rate market, and
- At the end of the financing period, the asset will be free and clear of all debt while still providing a steady stream of cashflow. The downside of a long-term solution is that these mortgages typically come with hefty pre-payment penalties over the first five years of the mortgage period, which makes it more costly if you want to refinance the asset as/if long-term interest rates move down during that five-year period.
“We work very hard to understand the end game of our borrowers. Mid-term solutions and long-term financing solutions are both attractive options for the SFR investor. But, at the end of the day, we want to come alongside our borrowers to structure the solution that best fits their need.“
Who is Funding My Loan?
While shopping the capital markets for long-term financing solutions, you are sure to run across traditional banking institutions and private lenders eager to help you. Consider these points along your search:
Time is money. Traditional banks will usually have a lower interest rate than private lenders (by a whole or half percentage or so), but they are slow. It’s not uncommon for a traditional bank to take 60 days to close. There’s a lot more documentation and red tape associated with conventional lenders, which can cost you time. We work very hard to close 30 days after receiving the borrower’s application, in many cases we can close as soon as 15-20 days.
Will you get a quick no? Don’t get sucked into trying to over-engineer a financing transaction by an eager private lender that just wants to close the deal. We strive to be the quickest yes and the quickest no in the industry. A lot of private lenders are reluctant to say no and believe they can find a way to say yes. This only leads to the lender dragging their borrower through a stilted ‘approval process’ that ultimately leads to a no. There are deals that make sense and deals that don’t, and we’re prudent with our borrowers’ time.
Should I Start My Rehab-to-Rental With a Fix-and-Flip Loan?
This year, about 25% of rental property loans dispersed by JCREIG Capital Funding were to investors that first purchased their property through us as a fix-and-flip. This is a smart move for several reasons:
JCREIG Capital Funding offers 100% financing up to 70% ARV for fix-and-flips, no money down. That means you get all the money you need to make repairs and raise the value of the property—without emptying your pockets. There’s no down payment.
If you choose to hold the property and need to refi, the process is seamless. JCREIG Capital Funding doesn’t sell our fix-and-flip loans to any other entity. So we have the documents at the ready to refi your loan as soon as possible.
JCREIG Capital Funding
Looking to refinance an existing hard money loan?
JCREIG Capital Funding is a direct Florida hard money lender.
We have been providing hard money loans to commercial and residential Florida real estate investors for over a decade.
Reach out to us @ 561-303-0334 if you require funding or have any questions.
