When to use a portfolio lender?

43 Replies

Hello everyone,

Newbie investor here with 2 rental properties under my belt. Now that i've been bitten by the bug I'm ready to keep going. I want to do the best planning ahead that I can. From all that I have read here on BP it seems as if after 2 more loans (total of 4) I will begin to find getting a mortgage much more difficult. I've read a few different numbers on this with 10 being a possible total, but it sounds like at some point I will be restricted with the big banks. From what it sounds like at that point I will want to begin seeking out portfolio lenders who finance in house. 

The question I have is it a good idea to start using a portfolio lender now to keep all my loans going forward with the same lender? Does this offer any advantages? Will this help me in growing my real estate investing business? For the time being I am buying and holding, and would like to continue to grow as much as I possibly can.

Thank you in advance for your help, and if anyone has any lender recommendations for the ChicagoLand area it would be much appreciated!

My opinion... get the cheap loans first, then only use the portfolio lender(s) when you have to. 

Is there an advantage in your opinion to using a bank who offers portfolio lending for all loans to build a relationship with them ahead of time?

Five years ago I would have said 'yes' but not now. You may save a little on documentation/paperwork if the bank that you use does both commercial and GSE (e.g. Fannie Mae 'conventional') loans. Until you get past 4 (or 10) the bank will just originate and sell off your loan to Fannie or Freddie anyway. 

Here are a couple thoughts, from my experience.  You will want to start building a relationship with multiple portfolio lenders, sooner is better.  If you are buying cash flowing property, then any increase in loan costs will be nominal, especially when you miss a deal because you haven't built the relationship.

I recommend working with multiple lenders.  This demonstrates to all of them that you have built trust with more than one lender.  The old saying "don't put all your eggs in one basket" certainly applies here.

I buy all of my properties in an LLC, so I automatically can't do Fannie/Freddie financing. The first question I ask when speaking with a lender is if they underwrite based on Fannie/Freddie guidelines. It they say yes, the conversation is over. I deal exclusively with regional lenders that do portfolio lending.

I like working with regional lenders because I can speak directly with people that play a part in the decision to lend.  I like that and it is worth every penny that it might cost me due to slightly higher rates.  I can pick up the phone, get a VP on the phone, pitch the deal to him (or her), and get an answer fairly quickly.  This process becomes even easier as time goes by.  It wasn't as easy in the beginning, but it was still much more common sense than trying to figure out how to convince a computer algorithm that I was a good lending risk.

@Mike Barry Keep in mind that if you get financing for houses #3 and #4 from a commercial (portfolio) lender, these loans will count towards the GSE total of 4. So you can no longer say 'I only have 2 Fannie Mae loans, so I still have a few low cost mortgage 'bullets' left.' The rules changed several years back. Even if you buy #3 and #4 in an LLC and finance through the LLC in a commercial bank, the Fannie Mae underwriting process will "discover" those loans (assuming you are 50% or more owner) when they review your pass-through finances on the LLC taxes. So I mostly agree with @Adam Johnson but personally I would get the 4 FNMA loans first, then 'shop' for a lender... if that's what you want to do. Since my company borrows in one asset class, we generally use one (the best, theoretically) lender for that class up to their local loan concentration underwriting limits. The banks here we deal with have "resistance" (meaning decision makers become 'non-local') at $500,000 and $1M.

Great advise thank you both for your expertise much appreciated.

Quick question...do lenders either lend with fannie/freddie or portfolio? In other words could I find a lender who does both to build a longterm relationship with now?

@Mike Barry  there are lenders that do both.  Since I am in a position where I can only borrow from portfolio lenders (too many mortgages), I can't offer a lot of feedback.  I can offer a little information that might help though.  Many of the ones that do both or only do portfolio lending will be smaller regional or local banks and some credit unions.  You may or may not deal the same person at the bank to discuss both types.  I also would not put a lot of weight on building a relationship with the bank by doing a Fannie/Freddie deal with them.  Here's why:

Fannie/Freddie (GSE) deals are only originated by a bank, based on guidelines established by the GSE's as to what they want to see in a loan.  A relatively short time after origination, these loans get bundled into mortgage-backed securities (MBS) and sold to the GSE's.  So, in essence, the originating bank only has money in the deal for a short period of time when the deal is sold to the GSE.

Portfolio loans, on the other hand, are the bank's money loaned out for a longer period of time that comes back in in the form of a monthly payment.  Good history every month over a period of time helps you build credibility in the eyes of the lender.  The money source is essentially the same for the duration of the mortgage.  These loans are NOT sold off as MBS, but are instead held on the balance sheet of the originating bank.

I am not a banker, so my explanation may not be picture perfect, but that is a rough idea of how that world operates.

As @Chris Martin  mentions, the GSE underwriting looks at ALL mortgages you are involved with of any significance, so you could potentially choose to do a couple more Fannie deals before going ahead with the portfolio route, but you can't do it the other way around.  Once you hit 4, your out of Fannie.  I have heard of a few exceptions with large capital reserves.  

Frankly, I simply avoid Fannie underwritten deals because I am too far outside of their "box" anyway, so it isn't worth my time to stay informed on specific details.  Yes, I do pay more in interest and generally have shorter amortization periods.  However, since I don't fit in their "box", my choice is to keep going  my way or let Fannie stop me.  I'm still going and happy with it.  Personally, I really like being able to call up one of my bank contacts and run the deal by them directly.  If "feels" far more professional.  I don't have a lot of financing obstacles to overcome as long as I bring a solid deal to the table.

Hope that helps.

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@Adam Johnson, great information.  I am a new real estate investor in Buffalo and I have been having a hard time finding porfolio lenders in the WNY area.  Do you know of any in Buffalo or WNY that you would recommend talking to?  Any help would be appreciated. 

@Adam Johnson Great Advice!

@Mike Barry I actually ran into the same problem but a little backwards.

I purchased about 11 duplexes cash, and then went to go refi them but was told by all of the big banks that I could not have more than 4 mortgages. So I started looking around some of the smaller banks who could do these types of deals.

I ended up finding a bank who would refinance with a portfolio loan 70% Loan to Cost (Not LTV since I didnt own them for more than 2 years) at a 3.75% variable rate.

Your best bet is to find local banks with only a few branches.

Thanks everyone to all the great advice this is a tremendous help! I've already found a local portfolio lender by using BP. He advised me I mine as well use up all the cheap Fannie/Freddie loans I can and when I am a the point where I no longer can than to call him!

Originally posted by @Adam Hamm :

@Adam Johnson, great information.  I am a new real estate investor in Buffalo and I have been having a hard time finding porfolio lenders in the WNY area.  Do you know of any in Buffalo or WNY that you would recommend talking to?  Any help would be appreciated. 

 Best bet is to start with smaller regional banks (or local).  You will learn the most by simply asking them.  I have worked with Bank of Castile and Canandaigua National, but they are closer to Rochester area.  Knock on some doors and ask the question.

Thanks,  definitely plan to contact some smaller local banks. 

Thanks @Mike Barry for asking the question. I too have had this question and have been trying to get more concrete answers. Hesitant to post for lack of what / how to ask. Finally my search in BP has paid off.

And many thanks to @Adam Johnson and@Chris Martin for making the explanation so simple to follow. It was right on target for me.

I'm currently at 2 mortgages and like @Mike Barryit was suggested to me to use up the other 2 (lower interest rate) and then seek out a portfolio lender.

I've been in contact with one here on BP and am looking in my local area to build up a relationship, bounce my thoughts off them with regards to my business plan (buy-n-hold currently, not necessarily interested in flip-n-fix at this moment).

I assumed the rates to be higher. I'm seeing 6%+ interest one and due to the structure (in-house,) I'm assuming this is typical.


thanks again for this valuable conversation!

@Adam Johnson can you explain this:

The first question I ask when speaking with a lender is if they underwrite based on Fannie/Freddie guidelines.  It they say yes, the conversation is over.  I deal exclusively with regional lenders that do portfolio lending.

 

I was guessing it was because if they do underwrite based on FF guidelines, then they don't do portfolio structures. But I'm guessing and thought I'd ask to get the right answer.

Thanks

If I may get wonky here for a moment, let me give you the banker's point of view.

By definition a portfolio loan does not get sold, the term means the lender holds it in their own 'portfolio'. The term portfolio lender or not isn't the whole story. A loan is a portfolio loan or it isn't but that doesn't mean all loans the lender does are one way or the other. More specifically you'll hear things like on balance sheet (portfolio) or off balance sheet (sold to a third party) financing.

As a banker I can bore you with more details if you want, but I think the big take away is to learn to understand the jargon. The reason is that if you understand the terms being used, you can understand if something is in or out of context. Nothing screams professional more than someone who understands the lexicon and then negotiates using that information.

For people who listen to the BP podcast, you've probably heard (and I can confirm) that professionalism matters a great deal in the lending process.

Right, wrong or indifferent, the facts are that if you know the secret handshake of any club, you're more likely going to get a warm reception from that club. Knowing how banks operate and the context of terms you're negotiating goes a long way.

Originally posted by @Daria B. :

@Adam Johnson can you explain this:

The first question I ask when speaking with a lender is if they underwrite based on Fannie/Freddie guidelines.  It they say yes, the conversation is over.  I deal exclusively with regional lenders that do portfolio lending.

I was guessing it was because if they do underwrite based on FF guidelines, then they don't do portfolio structures. But I'm guessing and thought I'd ask to get the right answer.

Thanks

 

My 2 cents.

Most banks doing mortgages have a commercial lending side and a residential lending side. The Residetial lending side handles mostly owner occupant (O/O) loans and follows the Fannie Mae/Freddie Mac underwriting. They may do FHA and specialty stuff like USDA loans... all O/O.

The commercial side handles, well, commercial stuff. They do things like financing for malls, etc., as well as construction loans. And some do real estate investor loans. Note well that real estate investor loans as discussed in this topic are not nearly as common as loans for apartment building financing, new construction (builder) loans, etc. (You can find specific details in places like fdic.gov and a bank's SEC documents (e.g. 10-K filings)).

When talking to a commercial lender, it's key to know their "buttons". In small banks, you may find they have net worth requirements that F/F doesn't even have. Know what an accredited investor is even if you aren't. Some banks have lending limits (e.g. loan values > $200K (or $300K or $400K) per tranche), most have DSCR ratio limits, etc.
For example, my company's lender says (pg. 29 of their 10-K) "Underwriting criteria and procedures for commercial real estate loans generally include ... Cash flows from the project financed and aggregate cash flows of the principals and their entities generally must produce a minimum debt service coverage ratio of 1.25:1." In this test, they give you the answers. The more you know about the lender and their underwriting, the better.

With small banks, as your borrowing grows, you may be "invited" to talk to someone who deals with risk management. Treat it as an opportunity. Again, know your lender and always be able to defend your numbers.

I actually just talked to my portfolio lender this week.  I found that I would have to put 30% down instead of 20% that I was used to .  Is that typical for a portfolio lender ?

Originally posted by @Daria B. :

@Adam Johnsoncan you explain this:

The first question I ask when speaking with a lender is if they underwrite based on Fannie/Freddie guidelines.  It they say yes, the conversation is over.  I deal exclusively with regional lenders that do portfolio lending.

I was guessing it was because if they do underwrite based on FF guidelines, then they don't do portfolio structures. But I'm guessing and thought I'd ask to get the right answer.

Thanks

That is correct. If they are writing FF loans, they don't "like" my file, too many mortgages, owned by LLC's, etc, so I won't waste time going further.

Hi-

This thread isn't too old so I'm  hoping you are still out there.

I went away and did some thinking and more reading and looking at my next investment. I think this question still ties in with the original posting. :)

I'm looking at getting a duplex to get me into the multi-family units, starting small then hopefully growing to more units.

I found an investor who is selling all of his units (5 duplexes but will sell 2 of the duplexes if someone just wants 2). Although I'm looking for just 1 duplex, I think 2 would still be low enough to handle. It gives me 4 rentals instead of 2 but it's still a low number to manage.

With the 2 mortgages I have now, if I just get the 1 duplex, that will be #3 with 1 remaining mortgage.

I'm not sure if flipping back and forth from conventional lending to portfolio lending is done until the max #4 mortgages is exceeded.

1-Is it  possible to buy a quad (2 separate duplexes) and have that as one mortgage in the Fannie world? 

2-Or, would I have to go to a portfolio lender (I don't have one as of yet) in order to do a deal like this?

3-If I had to go to a portfolio lender and got #3 for the quad, will I still be able to get #4 through Fannie or am I now in the portfolio world as a result of getting the 3rd from a portfolio lender.

@Adam Johnson as an investor you seem to be heavily into the portfolio lending and after jumping over that fence can you give some advise on your experience.

@Michael Worley you are a banker, is this something that you have run across.

Phew.....

Have a great weekend!

@Daria B.  I will give it a shot.  I never "bought in" to the Fannie world for investment properties, so I will by speaking from the sidelines more than as somebody in that world.

As to your first question - I am almost certain that 2 properties would be considered 2 mortgages for Fannie.  I would also like to clarify the use of "quad".  Even though there are 4 units total, it would still be more accurately described as 2 duplexes, as I assume that they are different parcels of land.  If there are 2 buildings, each with 2 units on the SAME parcel of land, then they might then be considered a quad.

I think that your second question indicates a little confusion over the number of mortgages.  It is my understanding that you can have 4 or fewer mortgages.  Number 5 or more becomes more of a challenge.  I have heard that with heavy reserves of cash there are exceptions, but again, I am not in this world so I my information may or may not be accurate.  Not sure if that answers this question exactly.

Your last question refers to the 4 mortgage limit.  It is my understanding that it is 4 mortgages max with your name on them, regardless of who holds the mortgage.  This also includes any private mortgages too I believe.

Your best bet is to verify this with a mortgage banker or broker that deals with Fannie underwriting.  I'm pretty sure my answers are accurate, but because I don't work with it, I may be off a little bit too.  Hope that helps.

@Daria B.

The simple answer is that it depends on the legal description. Two buildings on one legal description is financed as one property. Two buildings on two legal descriptions is financed as 2 properties. If you want all of the buildings on one property and they are not currently platted that way you can have the city/county replat them through what's called a consolidation. You will have to pay for a plat, then a subsequent survey (the difference between a plat and a survey is the plat does not outline the structures, the survey does) to borrow money with the property as collateral. The lender isn't usually the one that requires it, the lender requires a title policy and the title company won't issue one without the property survey.

As for the financing, you can finance Multi Family properties with Fannie Mae but will likely have to go through their small loans program for this scenario. You can have an unlimited amount of Multi Family loans through Fannie (they are non recourse loans).

As far as if I ever run across this as a banker, yes it's not uncommon. Any banker worth their salt can give you all the information they need in order to make a credit decision. If it's a commercial loan, ask the banker to do a site walk with you after you give them the financials (assuming the numbers look good, they'll want to understand the property/collateral in more detail, no point in doing it before you have some numbers).