We’ve all heard stories of investors who own 100+ rental houses. How do they finance them? Traditional banks will not make more than 10 conventional loans to one investor. Even getting past 4 can be a challenge. So how do they do it? One option is to build a relationship with a local bank that offers portfolio lending. I called a dozen portfolio lenders in Birmingham, Alabama to find out what they offer investors. Here’s what I learned.
6 Reasons You Want A Portfolio Lender On Your Team
There are many reasons to explore this method of financing. Here are just a few.
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Greater access to capital
As investors, we need access to capital. The more the better.
Portfolio lenders can be a deep pool of capital to draw on. Some lenders told me of recent deals involving 20 million in financing. Some drew the line at not lending more than 1 million to an individual investor.
Either way, they can be an excellent source of funding for your investments.
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Add a well connected investor to your network
These bankers are essentially partners in your investment. They want you to succeed, and for your loan to perform. It makes them look good.
The value they bring can be more than just capital. They see what other investors are doing. They know where development is happening. Their knowledge can inform your own strategy as an investor.
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No seasoning requirement
None of these lenders required a history of rental performance before lending. It’s hypothetically possible to buy a vacant property, fix it up, rent it, and close a loan within one month.
This gives investors the ability to grow their portfolio’s much faster than using conventional mortgages.
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Quick Closing
This type of loan can close relatively fast. 2 weeks would not be unusual.
They are usually doing the underwriting in house, so there is less “back and forth” than with conventional loans.
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Flexible
The collateral requirements are more flexible with these types of loans. For example, they could use 5 properties as collateral on one loan (blanket loan).
Terms can be flexible. Depending on your relationship with the lender, you may be able to negotiate better terms. Because they keep these loans in their own portfolio, they essentially write their own rules.
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Lending to an LLC
Usually, conventional lenders will not lend to an LLC.
Since LLC’s can be an important part of asset protection for real estate investors, the ability to apply for loans through your LLC can be valuable. All lenders I spoke to offered this. Some even required it.
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9 Keys To Understanding Portfolio Lending
There are some huge differences you need to be aware of. Understanding these differences will save everyone time and smooth out the application process.
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It’s relationship based
There is less government regulation on these types of loans. The process is less about “box checking” and more about mutual trust and understanding.
Your business relationship history makes a difference. The more deposits you have at the banks the better. The more successful loans the bank has given you, the better. If they’ve been successful betting on you in the past, they’re likely to bet on you in the future.
Personal relationships matter. This is true for any business dealings. If they know, like, and trust you, they can tweak the presentation of your documents, and rubber stamp applications. Your personal reputation can play a much larger role in loans like these.
When these bankers approve your loan, they are taking career risk on you. If they make too many bad loans, they could lose their jobs.
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Many variables
There are many variables that bankers must consider for these loans. Current interest rates, business climate, and economic outlook all effect they type of loans they will offer.
Changes in bank leadership can drastically change your bankers ability to approve investment property loans.
Even losses in other parts of the bank’s loan portfolio could affect your approval.
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Debt Service
This can be a component of the banks underwriting process. They were usually looking for between 1.2 and 1.3 debt service coverage minimum.
Here’s an explanation of debt service coverage.
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Shorter terms and amortization
Most bankers I spoke with would not “lock-in” a rate for more than 5 years. Amortizations were generally 10 to 20 years.
This compares with a 30 year rate lock and a 30 year amortization on conventional loans.
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Higher rates
Rates on these type of loans were mostly between 5-6%. For banks that did offer longer terms, the interest rate increased drastically with the term. The highest quoted rate was 12% for a 20 year term. Current 30 year conventional mortgage rates are around 4%.
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Recourse
This is another downside to portfolio loans. Recourse means that you are on the hook if the loan goes bad.
The bank won’t just foreclose on the property. They will sue you to pay back the amount of the loan.
Banks I spoke to would only consider making non-recourse loans to Ultra High Net Worth Investors (10 million plus)
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Variation from bank to bank
Rates, terms, and appetite vary from bank to bank for these loans. Some require 25% down payments, while some only require 15%.
I also noticed that bankers generally don’t keep track of what their competition is doing in this space. They may tell you “no one will do a 20 year term”, but if you look hard enough you can find it.
Like most investors, they want to lend on terms that work for them, regardless of what others may offer.
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Some will finance renovations
It’s possible to wrap some or all renovation costs into these loans. This is on a bank by bank basis.
If you’re looking to build new construction homes, these are also the banks who will finance your projects.
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Rates, terms, and appetite are always changing
Rates vary with the underlying economic conditions. Each bank also has their own analysis for how risky each loan is. The more risky the higher the interest rate they will charge.
The terms and amortization offered can change month to month based on economic outlook and rates. If the bank is expecting rising rates (like they are now), they will shy away from offering longer term loans.
Each bank must manage their own portfolio risk. They do this by diversifying as much as possible. They need make sure their loans are not too concentrated with one investor, one asset class, or one city.
You may get declined for a loan in Birmingham, but get accepted for one in Chelsea simply because the bank wants to diversify its portfolio.
Where to find these lenders?
Generally, Wells Fargo and Bank of America are too big to be interested in making this type of loan. Look for institutions between 200 million and 1 Billion in assets. You can search this information on the FDIC website here.
Many banks that have a commercial arm will do these types of loans. Sometimes the person answering the phone isn’t aware of their programs. When you call, it’s best not to ask about “portfolio loans,” that may be confusing.
I simply asked for “information about lending on investment properties.” This usually got me the information I needed.
Portfolio Lenders In Birmingham, Alabama
Most of the local banks I spoke to were open to this type of lending. If you already have a relationship with a bank or credit union it’s certainly worth asking them if they make these loans.
However, I’ve consistently heard good things from other investors about these banks.
There are also many national, internet based lenders that may be worth interviewing.
You might find Mark Ferguson’s list of national hard money and rental lenders helpful.
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