$2MM Portfolio Loan Successfully Completed! Lessons Learned

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I know that this post is long, however, I think that it can provide some insight into the process of getting a portfolio loan for those willing to take the time and effort to read it.

My Portfolio Loan Story

I feel like I just finished an ultra marathon.  We just finished getting a portfolio loan on 18 properties in Arizona. This was the process.  Hopefully this can be helpful to people looking to do a portfolio loan at some point.  

Towards the end of last year we had several properties that we had purchased using hard money and we wanted our local bank (the bank that had already given us 1.6 million in loans on other properties) to refinance us out of hard money.  The bank stated that they would need our tax returns for 2018 so we would need to wait to do our taxes for 2018 in order to do the refinance.  

We needed our financials but my CPA was unavailable

We got all of our financial information to my CPA as early as we could at the beginning of 2019 but, due to a death in his family, the taxes were not done until the end of April or May.  We were patient with our CPA during his mourning process, however, we were also anxious to get these loans done ASAP.  We already had to pay extension fees on the hard money loans because the loans had gone past their original maturity dates.  

My go-to bank turned me down

We finally got all of our information to our local bank.  They started digging deeply into at our financials and the underwriter came back saying that they weren't going to do the loan.  We were confused and frustrated.  I followed up with my banker to find out why.  It turns out that the bank got a new risk manager who wanted to be more conservative and this new guy didn't like our overall Global Financial Statement where as they were lending at 1.15 before, now they were only willing to lend at 1.25.  So ultimately we had to look for another bank.  

A "relationship banker" that really cared about the relationship

I had already started working with another bank in 2018 to refinance some other properties, but I didn't want to go with them on the current properties because the banker I was working with was not very attentive. Also, I felt he pushed for some loans that would benefit him and his bank more than me so I wasn't excited to talk with them about getting these newer properties in long term loans with them.  But I needed to get the loans done (some of which were manufactured homes and most banks wouldn't loan on manufactured loans for investors) and they were a viable option.

I contacted them and my previous banker was no longer with the bank (so much for being a "relationship bank").  I shared my concerns with my new "relationship banker" and he really stepped it up and went to bat for me.  So I gave him all of my financials, including needing to get updated lease agreements for my whole portfolio - not fun, but something that should be done anyway.  Also, I give my tenants a $100 discount to pay the rent on time and to take care of all of the little repairs for the property and the rent rolls I gave my last bank had the discounted amounts; so with this new bank I was going to put what they actually had written on their lease instead of the discounted amount.  Additionally, as we updated our lease agreements, we found that we needed to do some yearly rent increases with several of our tenants.  So ultimately our Global Financial Statement looked better than with the previous bank.

Because we have complicated business structures and financials and because we try to minimize our tax burden, we had to have my CPA write a letter to explain our finances to the bank (this is a benefit to having a competent CPA do our books).  After explaining our income and then adding back in all of the capital improvements and depreciation, our bankers were able to see our true income for 2018.  

Creating the deal

The bank then stated that they were willing to do a refinance of the properties but that I would need to include some of our other properties into the portfolio loan rather than just doing 7 or 8 new loans for single family homes.  They combed through our properties and picked out several that they liked and wanted in the refinance.  The downside was they were going to give me a loan at a higher interest rate than the loans that the properties had on them already so I didn't like that, but since the homes had appreciated a lot, I was going to get a lot more money out and I would be able to pay off several 2nd position notes on these properties where I was paying out 8-12% interest.  So ultimately it was going to be a really good deal for us.

Stipulations

Another condition for the bank loan was that I keep $150k in the bank at all times as reserves for the loan that they were going to give me.  This was tough because we recently had a contractor take 85k of our money that he paid him for rehabbing 3 of our properties and spend it on trying to fix his life that was falling apart rather than rehabbing our properties.  This contractor worked with us for over 2 years and was a good friend so it was really a difficult and sad situation for both him and us.  Regardless, we had a lot of our money tied up in several of the 18 properties and it was very difficult to scrape up all that money to just sit in their bank.

Appraisal anxiety

Then it was time for the appraisal.  My banker called me and told me that the bank was going to give me what was called a bulk sales approach appraisal (something stupid that basically means that if the bank had to liquidate my portfolio quickly how much could they likely sell it for as a packaged deal).  They basically were going to do an appraisal on each property and then add them up and then discount it about 15% (lame, I know). But, he told me that they would lend at 75% rather than 70% to try to soften the bad news.  I put up a bit of a stink about it and let him know that I didn't want to be jerked around and have the bank lead me on just to put me into a bad deal at the last hour.  I also told him that I had another bank that was working on the loan as well (and that was true.  When I do large loans like this, I will often have 2 banks creating the loan at the same time in order to create competition which ultimately benefits me as the customer and in case one bank falls through, the other bank can close the loan). My banker came back and said that he could try to get the loan from a 20 year loan to a 30 year loan in order to create more cash flow.  So we proceeded further.

The bank got 3 different bids for appraisals. They ranged from over 8k to about 4k.  We went with the lower appraisal for obvious reasons but also because I knew the appraiser from the last properties of mine that he appraised and he did a decent job before.  He only needed to go inside 5 out of the 18 properties and because I told the bank that it would be difficult to coordinate all the tenants of the 18 properties to be there to allow the appraiser to come in, the bank let me choose which of the 18 properties would be the easiest for the appraiser to access.   Rather than just looking for the easiest, I, of course, went for the best 5 of the properties  so that he could get an idea of how nice I make my properties.  I had my assistant drive him around to each of the properties to help the tenants feel comfortable and to help him get around to the properties more easily.

I struggled sleeping for the next 2 weeks as I was really worried about what the appraised values was going to come in at.  I needed the appraisal to come in higher than expected in order to not have to come into the refinance with extra cash because of the stupid bulk sales approach method.  Luckily, the appraisal come in at 3.1 million and we were able to get a 2 million dollars loan on it including a 100k cash out.  I was really happy about that, but I wasn't out of the woods yet.  

Last minute negotiations

One of the things that made me nervous about the loan docs was that they did not have an automatic renewal but I would need to prequalify for the loan in 5 years.  We worked it out to where I could get the loan renewal to go out to 7 years rather than 5 with such a small difference in the rate that it didn't really matter.  Also, setting up auto payments, and opening up a corporate credit card with them lowered the loan interest rate as well.  So the interest rate on the loan actually came down to 4.75%, 30 year amortization, 7 year balloon payment.

The whole loan process took around 5 months and just finished. It was long and arduous but it finally ended well.

My advice to the investors out there is to not give up when working with banks on financing.  It can be a long and arduous process but the reward at the end is worth it.  

Let me know if you have any comments or questions.

@Shiloh Lundahl well I just learned how much I don't know about portfolio loans! Thanks for this informative post. I'm in the beginning stages of a multi-year plan for growing my portfolio and I think the financing is what gives me the most anxiety about the entire process. I'm great with getting single family loans but the commercial side of things really is confusing to me. Could you elaborate on just a few things from your post if you have a second? 

What exactly is included in your Global Financial Statement?

When you talk about your bank lending at 1.15 instead of 1.25, what is this in reference to?

It sounds like there is a fair amount of negotiation that is allowed with the commercial loans. Obviously you can't name all of your terms but is it common to be able to have some negotiating opportunities with a larger loan like this?

Thanks for your time and congratulations on your loan closing.

We own 28 SFR properties and banking is my number one concern. Last year I had a bank pull my approval after appraisals due to the fact another investor went bankrupt. We just used hard money for the first time to buy 5 with the thought we will go out for a LTV loan in 5-6 months. I am talking to 5 banks trying to figure out what to expect when we go to market at yearend.

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@Ben Sears A Global Financial Statement is a snap shot for the bank to take a look at your financial health and the financial health of you businesses.  It's kind of like debt to income ratio but it includes more things as well.  They want to know that for every $1.25 that comes into your hands, that only $1 is going out of your hands.  For us, because we don't live off of our real estate income and we are in the building phase, we are acquiring more properties and using debt to do it.  It is important not to become over leveraged in doing this because if you are and there are issues that come up, it can sink the whole ship.  

@Jay Hinrichs Could you explain better what a Global Financial Statement is?

Originally posted by @Shiloh Lundahl:

@Ben Sears A Global Financial Statement is a snap shot for the bank to take a look at your financial health and the financial health of you businesses.  It's kind of like debt to income ratio but it includes more things as well.  They want to know that for every $1.25 that comes into your hands, that only $1 is going out of your hands.  For us, because we don't live off of our real estate income and we are in the building phase, we are acquiring more properties and using debt to do it.  It is important not to become over leveraged in doing this because if you are and there are issues that come up, it can sink the whole ship.  

@Jay Hinrichs Could you explain better what a Global Financial Statement is?

to me it would be full underwriting.. ALL LLC tax returns and K 1s bank accounts.. current p and L and personal financial statement.

for me since I have been with the same banker for 25 years its just annual updates.. I would HATE to have to start over given the complexity of what we do..  I mean sometimes I confuse myself :)

@Ronald Cooperman I found that having relationships with multiple banks is really a best practice when it comes to getting loans.  I work with probably 8 banks and have probably 40 different accounts (my CPA hates me).

@Shiloh Lundahl and @Jay Hinrichs thank you to both. I think the commercial lending space is definitely something that I'll have to start wrapping my head around as we grow. If I can ask, when is a good time to go away from traditional mortgages and start to look at the portfolio loans? Obviously there is the number of loans per person limitation but I didn't know if there is another strategy at play. 

Originally posted by @Ben Sears:

@Shiloh Lundahl and @Jay Hinrichs thank you to both. I think the commercial lending space is definitely something that I'll have to start wrapping my head around as we grow. If I can ask, when is a good time to go away from traditional mortgages and start to look at the portfolio loans? Obviously there is the number of loans per person limitation but I didn't know if there is another strategy at play. 

our lines of credit are for value add short term deals and or horizontal development of a community and vertical construction.. I personally have no long term investment properties.. IE rentals.. I sold my portfolio about 4.5 years ago I had 350 doors.. and the other ones I had I sold those all on notes so I just collect mortgage money not rent money.. 

For bigger rental portfolios U have plenty of choice local commercial banks  Corevest .. and many others the company that bought out Genesis etc.  plus a plethora of brokers.

@Ben Sears Yes, have cash and available lines of credit open to you.  We've tried to keep at least 100k in cash in the business that has this portfolio (now I need to keep 150k).  We keep cash reserves for other businesses that we have too.  So that is first and foremost.  Next, have other open lines of credit that you could draw from in case you needed to.  Then don't spend this money on acquiring new properties.  But keep it so you are not forced to start liquidating if unexpected financial situations occur.   Once you start liquidating because of a need for cash, you will get a lot less cash out because you are selling at a discount in order to sell quickly and that discount could be the money you need to stay afloat until things stabilize.  So have cash!

We had 3 unexpected financial things happen all within about a month that totaled about 235k either leaving our accounts or not coming into our accounts within a month or two and if we didn't have cash reserves and lines of credit then we would have been forced to start selling things at a discount which we almost had to do. 

Here are the 3 things:

1. We had our contractor tell us he couldn't finish the rehabs because he had spent the 85k that we had given him to do the rehabs

2. We had a 70k line of credit close (it was only an 18 month line and it was set to close but they had renewed the line for me the previous time and I thought that they would do it again because my financial situation was the same as last time but they decided not to).

3. We had 80k coming in to put down on one of our lease option properties that didn't come through.  

Because we were in hard money on the rehabs that didn't get finished by the contractor, and I also though that we were going to get that 80k for the property, or that we could at least use that 70k line of credit to continue to work on the rehabs, I decided to move forward on the rehabs in order to get them finished as soon as possible and get them rented out so that we could get out of hard money.  If we hadn't had reserves, we could have really been in trouble with all of those things happening to us at once.

Also, because of my network of people (friends, and fellow investors that I knew) I was able to pay off some private money loans with new loans that came in and secure them with deeds of trust on properties that had a lot of equity.  If I hadn't of had a good network of people who trusted me then I would have probably not met my obligations to the private money lenders who entrusted me with their money.  But as of right now, there is not one person who has lent money to us that could say that they did not get their full principle plus interest back.

The lessons learned were 1) always, always, always have some cash! and 2) build a good network of people and have integrity so that if a moment of difficult arises, your network can be a support and if you have always had integrity and have always repaid others, then people are often willing to help you out and be a support.

@Shiloh Lundahl thanks so much for that. I appreciate you getting into the nuts and bolts of your deals. I've always been under the thought of using the lines of credit to purchase properties but you have a valid point in keeping this as the reserve money. This makes far more sense while turning to private money to find deals. This will definitely help me start filling in the gaps in our business plan I think.  

@Shiloh Lundahl  great points of some of the most common pain points.

1. Contractor stealing money or just being inept.. happens to all of us myself include no matter how much you try to mitigate it.

2. thinking HELOC's are 30 year fixed loans they are not.. and relying on them solely for your business liquidity they can get called or frozen at the unilateral decision of the lender.. this sunk MANY people in the GFC.. I bailed out a bunch of them who where mid rehab and their heloc was frozen.

3. Share the wealth honor the investor so you always have them.. granted many folks do these things on their own and that's fine.. but if your scaling a business more likely than not your going to need money partners in some form or fashion.

@Shiloh Lundahl

Awesome job man. Not an easy process. This is why I like multi family. Getting a loan with MF is easier than SF in some respects.

Thanks for sharing my friend.

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