Financing a Rental Property: Different Types of Lenders

Financing a rental property is usually the biggest challenge people come across when starting their real estate journey. There are several options on your plate when it comes to securing financing for your first income property purchase. However, not many people know that. In most cases, people get stuck on the idea that they need to have a ton of cash stacked in the bank to start investing, which is far from the truth.

There are a couple of ways you can finance your first property that doesn’t involve waiting for years and saving your hard-earned money in pennies. Getting a mortgage, that is, lending the money from a third party to fuel your investment is the most common strategy when it comes to securing income property financing. However, there are other options out there as well, including the vendor take back mortgage and joint ventures, which I’ve covered in a couple of blog posts already.

What Are A, B, and C Lenders

This time, we’re going to focus on the types of lenders you can work with when securing your first income property. There are three types we’re going to discuss: the A, B, and C lenders. Here’s a brief overview of each:

#1 A lenders 

This category refers to banks and credit unions that cater to customers with good credit scores and a reliable income — these are considered an “A” clientele.  A lenders (banks) are subject to federal regulation, which means that the investor will have to be stress tested when they apply for a mortgage. When an investor gets approved by an A lender, the interest rate will be traditionally lower than the options at the B and C lenders.

#2 B lenders

Several banks in Canada, such as the Equitable Bank and Home Capital, offer financing options for a “B” clientele. These institutions offer a lower barrier of entry to qualifying for their products, but can offset that with higher interest rates. In other words, B lenders cater to people who may not qualify for a mortgage or a credit card at one of Canada’s six big banks. In case you lack either a strong credit history or a guaranteed income (recent immigrants, or the self employed, for instance), you will have to look for financing options provided by B lenders. When it comes to mortgages, this type of deal might not be the best idea. A mortgage is a loan that is given to an investor under specific conditions, and it’s necessary to take a good look at the conditions that B lenders are offering them to ensure that they won’t get trapped with high interest rates that the income property cannot afford.

#3 C lenders

Lastly, C lenders can be divided between Private Money lenders and Hard Money lenders. Private money refers to individual lenders such as your parents, friends or other individuals.  With Private Money you can have more control over the terms of the loan. You can offer payments, time frames and interest rates that suit your needs and offer a good return for your private lender. Hard money lenders are businesses that specialize in mortgages but are not subject to the same regulations that banks and credit unions are. Hard Money lenders finance deals for real estate investors as a business. 

Not Sure How to Finance Your Income Property? 

It’s far more difficult to get a loan from A lenders compared to B and C lenders. In most cases, people fail to qualify for a loan from A lenders so they end up giving up the idea altogether. Although the interest rates are traditionally lower when getting loans from A lenders, there are still plenty of other options for you to secure the funds for your income property.