This guest post by Jeff Ball of Visio Lending provides an overview of rental loans for single-family and vacation property investors and the role flood risk management plays when seeking the best financing possible.
Historically, most investors have financed single-family rental properties in one of three ways: through a second home loan, through agency investor property finance (Fannie/Freddie), or through local and regional banks. With the growing number of people who want to own portfolios of rental properties, particularly after the Great Recession of 2008, a new class of financing, referred to as rental loans, has emerged that offer many of the advantages of a commercial mortgage loan for single family rental and vacation properties.
One key advantage of rental loans is that they are underwritten based on property level cash flow rather than personal income. This means no tax returns or lengthy, complicated personal debt-to-income analysis – opening the market up dramatically to self-employed and part-time investors. Another advantage of rental loans is the ability to hold properties in legal entities to help shield investors from potential personal liability related to the properties.
Rental loans typically are underwritten based on a debt service coverage ratio, or DSCR, defined as the expected monthly rent divided by the monthly principal, interest, taxes, homeowner association and insurance expenses. Insurance expense includes liability, casualty and any required flood coverage. Investors looking to maximize the benefits of rental loans look carefully at ways to manage each element of the DSCR calculation. By overpaying for property taxes, HOA dues or insurance, an investor risks paying a higher interest rate or receiving a lower loan amount, or both.
AmeriFloodSolutions, Inc. offers a valuable service to investors looking to capitalize on the emergence of rental loans by helping them not overpay for flood insurance so that they can obtain the best financing possible.