Understanding Rental Loans

Rentals the Apex Way
At Apex Capital Solutions, our rental loan programs allow you to access long-term financing with multiple different options to meet every investors unique plan. With our loan programs, you can use our loans to unlock your existing equity, consolidate other debt, refinance, or purchase new rental properties. The rental loan programs that we provide for real estate investment properties allow beginning and experienced real estate investors to purchase individual rental properties to expand their portfolio. Our library of loan products are flexible to meet the needs of different rental property investors. We’re talking multiple ARM options, multiple pre-payment options, multiple term options and more. ​Like all of our lending programs we ensure a hassle free and reliable loan process for our rental loan programs. 
Advantages of Rental Properties

Tax Benefits

The Internal Revenue Service allows you to deduct many expenses connected with rental property in the categories of:

  • Ordinary and necessary expenses
  • Improvements
  • Depreciation

This means that you can deduct your insurance, interest on your mortgage, maintenance costs, and physical wear-and-tear on your property.

Depreciation may produce a nominal loss, which in turn you may deduct against other income. In other words, you may achieve net positive cash flow from the rental income minus expenses and still have a net loss for tax purposes. But be aware that depreciation also reduces the cost basis of a property for calculating capital gains when you sell your property.

In addition, the 2017 Tax Cuts and Jobs Act offers a number of tax benefits for landlords. If you own a flow-through entity (also known as a pass-through business) and operate it as a sole proprietorship, limited liability company, partnership, or S corporation, you now may deduct an amount equal to 20% of your net rental income—as long as your total taxable annual income from all sources after deductions is less than $157,500 for singles or $315,000 for married couples who file jointly.

Seasonal Rentals

If you rent your property seasonally, you may use it yourself for 14 days per year—or 10% of the number of days that you rent to others at a fair market price—and still be able to deduct your expenses.

1031 Exchange

In a 1031 exchange, you can sell a rental property and invest in another of “like kind” without paying capital gains taxes.

Passive Income Source

Perhaps the biggest benefit to owning rental property is that it’s a passive income source. This means that it is recurring income that requires relatively little effort to maintain. It can be an attractive option for people looking to make some money on the side, or even as additional financial security during retirement. Additionally, rental income may be taxed differently than employment income.

Of course, you’ll want to work out all the cash flows before investing in a rental property. In order to better ensure that being a landlord is more likely to be profitable for you, you’ll need to factor in all your expenses. Once you have an idea of your cash flow, you’ll want to assess whether the numbers suggest you’re likely to be able to make a consistent income on the property before purchasing.

How to Measure the Potential of a Rental Property

When you use a conservative LTV (loan-to-value) of 75% or less with a rental property loan, the gross cash flow should cover all of the above expenses and more. At the end of each month, you’ll still have cash profit left over to put into your bank account.

Before you apply for a rental property loan, consider these three income property ratios to help ensure your intended purchase has solid, positive cash flow:

Cap Rate

The capitalization rate – cap rate for short – compares the property’s net operating income (NOI) to the property purchase price:

  • Cap rate = NOI / Purchase price
  • $6,000 NOI / $100,000 Purchase price = .06 or 6% Cap rate

Although the NOI doesn’t include the mortgage payment, cap rate is a good way to screen out properties that may not cash flow. That’s because the lower the cap rate is without the loan payment, the greater the odds cash flow will be negative.

Rent Ratio

Rent ratio – also known as the “1% Rule” – compares the gross monthly rent to the total cost of the property (including acquisition and financing fees, and rehab expenses):

  • Rent ratio = Monthly rent / Property cost
  • $1,200 Monthly rent / $100,000 Property cost = .012 or 1.2%

A rental property with a very low rent ratio is a red flag that the investment will have negative cash flow. As a rule of thumb, the higher the rent ratio the better. Real estate investors who use the rent ratio usually look for a minimum ratio of between 1% and 2%.

Cash-on-Cash Return

Cash-on-cash return compares the amount of cash received to the amount of cash invested:

  • Cash-on-Cash = Cash received / Cash invested
  • $3,000 Cash flow received / $25,000 cash invested as down payment = 12%

The cash-on-cash return calculation is a good way to analyze how different financing options affect cash flow, because the cash received includes the mortgage payment expense.

Benefits Of Bridge Loans
  • Speed of closing: Bridge loans provide short term financing in just a few weeks, as opposed to home mortgages originated by a traditional lender. This speed allows investors to buy time and get the sale price or permanent long-term finance solution they ultimately want, instead of being forced to settle for a deal that doesn’t pencil out.
  • Opportunities for real estate investors: Obtaining a bridge loan means a real estate investor can take advantage of opportunities they would otherwise have to pass over. For example, a borrower can use the funding to buy one property that becomes available while they are selling another, without using a contingency clause or waiting for the first property’s sale to go through.
  • No Immediate Payments:Typically lasting a few months, and up to one year, bridge loans often allow a few months before the first payment is due. This provides buyers with a little bit of breathing room to get their finances in order.
  • Short turnaround: Bridge loans are ideal when a borrower needs cash ASAP. The loans are well-suited to helping borrowers who might be struggling with cash flow and who need a boost to get them through until a second loan gets approved or until they make a significant sale. Since bridge loans often have a short term, lasting less than one year, investors who participate in bridge funding programs can expect to see a return on their investment sooner rather than later.
  • Adapt To Market Shifts:There are some scenarios in which a buyer must purchase a new home, yet may encounter difficulty selling their original property immediately. Examples may include a work-related relocation, or an unexpected lull in the market. A bridge loan offers a solution for buyers who need to buy time to sell an existing property.
Rental Property Operating Expenses to Remember

In addition to the principal payments of the mortgage, there are several other operating expenses investors need to consider before buying a rental property.

All of these can be deducted as normal expenses to reduce taxable net income:
  • Mortgage interest payment
  • Property taxes
  • Rental taxes
  • Property management fees
  • Leasing fees
  • Repairs and maintenance
  • Capital reserve account contributions (a fund used to pay for future major repairs and upgrades)
  • HOA fees (if the property is in a homeowners association)
  • Utilities (although tenants in single-family rental property usually pay their own utilities, owners of small multifamily property sometimes pay utility fees like water, sewer, and trash and include those charges as part of the tenants’ rent)