You’ve found the perfect property to renovate and turn into a rental property. You’ve got great credit scores and a good job, so financing at your local bank shouldn’t be a problem, right? Unfortunately, banks aren’t as friendly toward real estate investors as you would think they would be.
Banks are heavily regulated businesses. They not only have internal auditors pouring over everything they do, but they have State auditors, the Federal Reserve, and the FDIC watching their every move. These auditors pull lists of the loan files that the bank has made since their last visit and demand to see the loan files. They review the entire underwriting decision, assign a standardized grade to the loan, and then assign a portfolio grade to the bank based on their findings. In my many years of banking I can tell you one thing for certain, auditors absolutely, positively hate smaller, non-institutional real estate investors. Many banks even have prohibitions in their underwriting guidelines against “real estate speculators” as they call them.
Regulators have no issue with banks setting aside a portion of their portfolio for home builders and larger property developers. Their statistics, however, show a higher than average default rate among non-owner-occupied residential real estate borrowers. If they see too many of those loans in the portfolio, they will downgrade the bank. Thank bank depends on higher ratings to get the best rates on the funds that they borrow. Lower ratings also drastically impact their ability to raise equity capital.
Luckily, there are non-bank, institutional funds that have entered the business of lending to fix-n-flippers and those that are building rental portfolios. Their rates are slightly higher than the bank, but they do understand how the investment industry works. If you do go to the bank looking for an equity line to get started, be ready for the possibility of push back from the bank if you put “real estate investment” as the loan purpose on the application.