When to use a portfolio lender?

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When to use a portfolio lender?

Mike Barry
Plainfield, IL · Member since 2015 · 111 posts · 17 votes

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!

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Adam Johnson
Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes
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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.

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  • Michael Worley
    Investor · Carrollton, TX · Member since 2015 · 109 posts · 76 votes
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    Originally posted by @Chris Martin:

    My understanding is that the Fannie Mae programs described above relate to affordable housing programs. FNMA has guidelines of 30% of AMI (Area Median Income) as the standard rent. I'm not sure if MSA Fair Market Rents apply, but it sounds like they may.

    https://www.fanniemae.com/content/fact_sheet/wpmfloanmkt.pdf

    The small loan program is not limited to "affordable housing" in the sense of HUD housing projects, it is geared toward providing "affordable housing" in the sense of being apartments vs. single family homes. They allow traditional multi family projects 5-50 units and the program is geared specifically for the "mom and pop" landlord.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
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    Given that @Adam Johnson and @Chris Martin have already passed along great info regarding portfolio vs conventional, one thing not yet mentioned is how the loan approval process for a portfolio lender can differ, even from one portfolio lender to the next. 

    Some will have the ability for a single loan officer to approve loans below a certain dollar amount, and approval by an executive or loan committee as dollar amounts go higher than that. Some will always require committee approval for any dollar amount loan. And if your loan will require a committee approval, you will want to know how frequently that committee meets to evaluate loan applications; could be once a month, and if your application comes along just after they meet you could have to wait until they meet again. 

    And we didn't even get into the portfolio lender's risk exposure limits with a single borrower or single type of collateral. That can vary too ...

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  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
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    @Adam Johnson, @Michael Worley, @Jean G., @Chris Martin, and @Steve Babiak

    Thanks all for chiming in I appreciate the knowledge transfer that you are doing.

    Yes, I referred to them as quads probably incorrectly and from now on I will just say duplex to not confuse. So, these 2 duplexes are separate parcels and I have no intensions or need to have then be one parcel.

    I wasn't sure how the bank (F/F) would view these properties, "as 2 properties but put them on one mortgage or 2 mortgages, thus now maxing to my 4". I know that a portfolio lender would allow them to be put into one "portfolio loan", according to one bank I spoke with, and from what I understand that would be one mortgage because it's "blanketed". I will confirm that. Now, whether F/F looks at this as my having 3 mortgages or 4, as you say I will have to confirm with them. Though I think once I jump that line I will be dealing in that world from that point forward.

    Some advise maxing out the 4 first, but, it seems that depending on the deal at hand is what determines which type of lender should be used.

    Actually, I wasn't even going down this path until I saw the other property and considered buying 2 rather than just 1. Had it just been the one property then I was going the F/F route because of %rates and the fact that I only have 2 outstanding mortgages.

    Low and behold, fate now throws a curve ball (not sure why I felt the need to do a sports metaphor), and now I'm having to learn about creative financing, legally of course.

    And @Michael Worleythis is yet another piece to this puzzle. If this is a viable option then it very well may be that FM could be the selected lender, given the number are good:

    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).

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  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
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    I looked at Investopedia.com and found this definition and I understand it to be that the bank takes the property that was put up for collateral (just like "recourse"), but, the lender cannot come after my other assets like a "recourse" loan would be. Even though "credit" is still tarnished in both cases.

    Please say yes, please say yes, please say yes.... :)

    DEFINITION of 'Non-Recourse Debt'

    A type of loan that is secured by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral, but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount. This is one instance where the borrower does not have personal liability for the loan.

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  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
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    The understanding I have from my (conventional) mortgage broker is that he can write mortgages 5-10 through Fannie, but he needs to sell them to a smaller pool of companies than mortgages 1-4. That's the only thing that makes #5-10 "harder" than #1-4. We are still at 4 mortgages at this point, so this hasn't been put to the test yet.
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  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
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    Then it's not a complete no-go with Fannie on the >4 mortgages. Is this just with your bank @Dan Schwartz based on your experience with them and what they are willing to "try" for you, or is this with any conventional bank?

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  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
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    Daria B. , of the four or five brokers I've worked with, this is the first one that told me HOW it's possible, and said that he'd done it before. Others have said that it IS possible, which is a pretty easy statement to make, considering that the FNMA regulations are standard and widely-read.
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  • John O.
    USA · Member since 2014 · 43 posts · 13 votes
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    Thanks to all for the great information in this thread.  I have a couple of questions.

    Generally speaking are portfolio lenders okay with lending to LLCs?

    And also do they take into account your personal debt to income ratio and other details from your personal credit situation?  Or do they primarily look at the assets they're lending against and the cash flow from those assets?

    Thanks again!

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  • Adam Johnson
    Rental Property Investor · Holley, NY · Member since 2011 · 507 posts · 347 votes
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    @John O. - many/most/all portfolio lenders will consider LLC's. I can't say exactly which it is. Fannie won't, at least not at the level that many BP'ers operate at. With the exception of my personal residence, all of my other properties are owned by LLC's, which is a primary reason I don't deal with Fannie/Freddie.

    @Daria B. - don't get too dreamy-eyed yet over the non-recourse loans.  They exist, but they tend to be available primarily to larger loans.  I can't give you an exact figure, but based on my requests, I expect the figure is 7 figure deals.  To answer your question, 2 parcels means 2 mortgages. 

    I would caution against blanket mortgages.  What happens if you want to sell one of the properties and keep the other?  You have to refinance the one you want to keep, adding extra closing costs and headaches.  Instead, see if the lender will accept separate mortgages, cross-collateralize, and later permit you to sell one property and keep the mortgage on the other(s).  Many will consider this option, provided it does not compromise their loan to value limits after one of the properties is sold.

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  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
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    aw come on @Adam Johnsonyoure taking my weekend groove way down. LOL

    Ok, so the non-recourse "may" not be in my grasp. There should be a handbook of every possible financial mortgage option.

    I have a discussion this week with one lender that offers portfolio loans and will be running these questions by them. The blanket sounded appealing....@(・●・)@

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  • Bruce Stayner
    Real Estate Investor · Snohomish, WA · Member since 2012 · 15 posts · 5 votes
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    I am not sure why there is so much emphasis on only four loans. I currently have five and have already been preapproved for number six. All of them being Fannie loans. Fannie has said you could have up to ten loans for at least two years now. The only difference is that after four they require 25% down instead of 20%. The interest rate still says in the 4% range. If I were to go to a portfolio lender they would require 30% down and 6% interest. For ten or fewer loans it is a no brainer from my point of view. Now if you want to buy in an LLC or take in partners or do many of the other things advocated on BP it changes the whole picture and you are going to have to look elsewhere.

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  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
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    Perhaps, @Bruce Staynerit's in the context of the post that is driving these conclusions? 

    I'm not sure as I am not versed in "portfolio loans/lenders" yet and am trying to learn about them based on what I've been reading from so many others here in the forum. 

    I have 2 mortgages, 3 properties and am buying [fingers crosses :)] another this year. I started looking into portfolio because of the combinations of purchases I am considering. After reading a lot of posts in BP, I started venturing down the path of portfolio.

    Instead of one property as I purchased in the past, I am looking at duplexes in addition to a SFR. Not knowing what I would end up with based on getting the deal, and wanting to know what financial structure I would need to use based on the deal is what lead me here.

    • If it were the duplex (there were 2 that I was looking at) then that puts me at 4 mortgages. 
    • If it was finding a SFR and 1 duplex it still puts me at 4.
    • And if I could find a SFR and 2 duplexes, well that just pushes me over if all are considered separate mortgages.

    It was also the consideration of a conventional bank processing multiple properties, if they did that. At the time I wasn't sure of the mechanics involved with underwriting when presented with multiple properties (ie SFR and a MFR <4).

    So that's my story in looking at "portfolio"....

    Now, if you state that the only requirement is additional down, I can handle that because I would rather have a lower percentage (4%-5%) than a higher one (6%+) and especially not too much more than required to put down. I don't mind 25% but 30% (:o

    Also, I don't do LLC and perhaps that is also the driving factor as I know @Adam Johnsonflavor of financing is "frowned upon" [ can you hear the baby in the GEICO commercial. :o) ] by F/F.

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  • Bruce Stayner
    Real Estate Investor · Snohomish, WA · Member since 2012 · 15 posts · 5 votes
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    You have to look at both your short term and long term goals. If your interest is in being a real estate mogul and doing hundreds of deals then yes, you are going to have to look at portfolios loans, owner financing, and all of the other methods that are talked about here. As for me, I am rapidly approaching seventy years old and ten nicely cash flowing properties would provide and excellent retirement income. So it depends upon your goals but I would think that as long as you are under ten properties the lower interest rate and lower down payment would be the key points.

    It sounds like you are trying to get all of your advice off this board without even talking to any lenders. I have found that most lenders are very open to talking in general terms about what they lend for without you having to actually apply for a loan. Right now I have at least three banks continually sending me emails about how they can loan on up to ten houses so I know the loans are out there. The question is if you can qualify for them and nobody here can tell you that. You have to go talk to the lenders. I would be more than happy to give you names but I am about as far away from you as it is possible to get and still be in the same country so I would suggest it would be more appropriate for you to do the leg work and find out what is available down there. I am not trying to step on anybody's foot here. The only point I was trying to make was that there seemed to be a big emphasis on four loans when I know from personal experience that far more than that are available. 

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  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
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    No, I'm not looking for answers completely on this forum and I didn't intend for my posts to give that impression. I just get caught up in the conversations and am interested in learning what others experiences have been and comparing to my own situation. 

    I actually have spoken to a couple of lenders here and at first didn't really know what to ask them. I've gotten some ideas from this forum and came up with more questions after my conversation with one lender to find the best fit.

    I'm appreciative of those that like sharing. I think it's useful to do knowledge transfer. I've even contributed to some topics myself that I hope were useful.

    :@)

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  • Bruce Stayner
    Real Estate Investor · Snohomish, WA · Member since 2012 · 15 posts · 5 votes
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    I agree completey. I follow many different threads but with the idea that I can pick and choose what is most appropriate for me. We are all different in our wants and needs and there is no one answer that fits everybody.

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  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    11y
    Originally posted by @Mike Barry:

    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!

     There are 42 responses, but to put it short and sweet portfolio lenders off you massive flexibility in your real estate business, in terms, and structuring. The down side is pricing and product term may not be as favorable as the vanilla conventional financing products out there.


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