Portfolio lender vs. Commercial lender

28 Replies

My husband and I have been investing in buy and hold rentals for 3 years now and we currently own 7 units across 3 properties. We have steady income as professors and strong credit ratings. As of this year our tax returns show rental income for the last 2 years and currently we have approximately $200K in equity across all of our properties.

I would like to move away from my traditional residential lender and start a relationship with either a portfolio lender or a commercial lender so that we can pull out some equity from our current properties for a down on a 20 unit in our area which is offered to us with seller financing and to build a long term relationship as our business grows.

Can anyone tell me what the difference might be between a portfolio lender and a commercial lender or are they essentially the same thing?

I plan on making calls one by one to all of the local banks in Northeast Michigan to ask whether they do either one or the other (portfolio vs. commercial lending) and whether they would be interested in working with us but I wanted to find out what the difference is before I do that. Any details on this would be tremendous! Thanks!!

@Dante Pirouz Why would you want to pay higher interest rate by going with portfolio/commercial lenders (they are usually the same) plus they would want to have your properties in LLC.

Why not do a HELOC or a cash out refinance to access the equity?

Because you can't get a HELOC on rental property, you might get a commercial line of credit. It's Home Equity Line Of Credit, not Rental Equity LOC.

Dante, they  are the same, a portfolio lender holds the loans they make, but hey can sell them as well, a commercial  lender usually holds as well, but it gets much deeper with participation loans where one lender may "sell off" part of a loan.

You can't cash out on conventional secondary market non-owner occupied loans any longer,  you'll need to go commercial, a bank may do so, but they will not be "booking"  the loan on the residential side. At the street level, it makes no difference what lender you go to, but you will have different loan to values, experience in management, tax returns, rates and terms on the commercial side.

BTW, I'm not a fan at all of lines of credit as they can be terminated at  whim. :) 

Why not get to the maximum of 10 Fannie/Freddie loans (or 20 if you split it up between your husband and yourself) and take advantage of the lower fixed rates you can get from a conventional loan before moving into the commercial/portfolio space?

@Dante Pirouz to answer your question, here's how I would define them:

Portfolio Lender - A company that loans money with the intent to keep the loan in-house and collect the interest.

Commercial Lender - A lender that loans money on a property generating commercial rent from a business activity.

So, yes they are exactly the same thing.  They are all small banks/credit unions/other companies that will loan you money based on the risk that you will re-pay them.

But I agree with many of the previous posters. If you have a great multi-family option sure go for commercial financing. But in the meantime you have 17 very nice conforming loans available to you.  And btw those could be 17 duplexes/triplexes/fourplexes.

@Avi Garg we have done 2 HELOCs already with one of our traditional lenders but the terms are not ideal since they are variable, interest only loans. I would like to lock in long term, fixed rate loans. Plus our traditional lender told me they can do a max of 4 loans on myself and my husband. I would like to put all of the properties we have into fixed rate, long term loans and get some of the equity out at the same time. I'm assuming that the rates for a portfolio lender would be better than an HML, right?

@Dante Pirouz I haven't had the chance to refi any of my existing properties but I thought we could refi the rental properties as well with long term, fixed rate conventional loans. The conventional loan limit is usually upto 10 properties and you might need to find another lender.

Yes some portfolio lenders should be able to do long term fixed rate financing. I have one through B2R

@Dante Pirouz - Lots of mixed information here so I'll break down my understanding as well.

As @Bill Gulley and @Jeff Kehl have pointed out a Portfolio Lender will hold their own loans. However this is not necessarily the same as a commercial lender. Many smaller to mid sized banks hold their own loans, regardless of whether they were originated by a residential loan officer or a commercial loan officer. They will have different underwriting conditions and the rates and terms will be different but to a portfolio lender this doesn't matter. Something else to be aware of is that many banks that are not "portfolio lenders" do actually make portfolio loans. So while they will sell of many of the loans the originate the often have special teams or groups that will develop relationships with people where they make loans to keep on their own books. These are often relationship based and if you just called up the bank and asked to speak to their portfolio lending department you would probably hear silence on the other end or be told "We don't do that"

A second point I'd like to clarify. Some portfolio lenders will originate individual loans per property. Others will allow you to do a blanket loan so that you only have one loan and one payment to make. There are pros and cons to both options but just recognize that some people refer to this blanket loan as a portfolio loan because they are loaning on your whole portfolio and not individual properties. As a result of this it's important to ask clarifying questions of your loan officer exactly how they'll handle your accounts. If they are doing a blanket loan, make sure you ask a lot of questions about how they value the assets and add new properties to the blanket loan as well as how to sell of a property from the blanket loan. Lots of these things can trigger conditions within the original loan agreement such as reappraisals (sometimes better for you if values are going up sometimes worse if values are going down), rate resets, or other fees.  Also be aware of prepayment penalties. Since commercial lending is far less regulated than residential things can change very abruptly at a bank/credit union when it comes to their commercial/portfolio lending strategy and you may find yourself searching for a new lender but also in a position where you have prepayment penalties if you refinance out of your current lender. This makes negotiating with a new lender much more difficult or expense depending on whether you can bring your existing portfolio and accounts with you (often a requirement from commercial lenders), or if you'd need to pay to get out of your loans early. 

Point number 3 - If your goal is also to do a cash out refinance then that's relatively straight forward, however if you're looking to get a line of credit across one or more properties that again becomes more complicated. Some lenders do not offer this, others have a limit to the amount they will lend out (i.e. if someone taps their line hard, you might be cut off from yours), As Bill mentioned a line of credit is not always guaranteed to be there. This is something you need to consider. Also in my limited experience of calling around to start inquiring about a business line of credit for my portfolio the due tend to be shorter terms and interest only, this contrasts with a HELOC which has a more traditional and often longer term amortization associated with it.

I had to call around to 30+ banks and credit unions until I found one that was offering what I was looking for. So it's good that you are prepared to do the same up in Michigan. They get a lot of calls from "newbie" investors who don't seem to know what they were talking about. I had much better conversations after spending a lot of time on BiggerPockets researching the options and different types of commercial financing options out there. Many of the loan officers were very appreciative of talking to someone who "knew what they were doing" I only own 4 properties so I wouldn't say I'm that experienced, but I've spent enough time educating myself that I'm not green either. 

Hopefully this will provide you with some additional food for thought and arm you with more questions to ask on BP and of potential lenders

@Dante Pirouz you are doing the right thing by moving to commercial financing.  Sooner or later every real investor will have to make that switch.  For what you are doing there is no real difference between a portfolio lender and commercial lender.  What you will want to do is get an idea of what property types you are focusing on.  Different lenders are "wired" for different types of deals.  It is not wise to attempt a 20 unit acquisition with a lender that focuses on 1 to 4 unit properties or vice versa.  Also if you plan on flipping properties then you will want a lender that focuses on that.   Remember commercial real estate is so diverse that it is important to make relationships with lenders and brokers that deal in your 'space.'      

Well worded post.  You are in growth mode; so, cash out refi's (or partnering up) are just part of that strategy.  As @Russell Brazil said, I would recommend taking advantage of residential financing for your existing properties and refinance them.  You can do that through your existing lender or any other traditional residential channel (including with a "portfolio" lender).  As @James Masotti said well, portfolio lender can have two meanings...(1) simply a lender who does traditional residential loans but does not sell them to Fannie/Freddie and (2) a commercial lender who does a blanket commercial loan on them.  I am recommending residential loans due to their favorable terms.

Sure, it's costly to refinance but that was likely in the cards to begin with if you plan to keep growing.

You mentioned HELOCs...if you buy a value add apartment, you can execute on the value add, refinance the apartment and quickly pay back the HELOC. Just make sure to get a commercial loan with a low prepayment penalty. Let us know if you need a hand with understanding commercial financing or with a business plan/financing package. It will not take you long to figure it out.

Keep us posted.  This type of topic is a lot more interesting to discuss then what type of holiday gift to get a resident or how to enforce rent due dates.  Go get that 20 unit!

Thanks everyone for these fantastic responses! When I start making my calls to banks to find one that does portfolio lending who am I asking to talk to? Is it the residential loan officer?

@Dante Pirouz

Go to the VP of Lending.  Explain your situation and he'll get you to the right person.  That way you get validation to his underlings that you're a person that should be taken care of and the bank will buy in more because one of the officers of the bank wants your business. 

Stephanie

Originally posted by @Dante Pirouz :

Thanks everyone for these fantastic responses! When I start making my calls to banks to find one that does portfolio lending who am I asking to talk to? Is it the residential loan officer?

If you plan to refinance into 30 year residential loans, you will be speaking with a mortgage officer (or a branch staff member)...same as you have done in the past with either a mortgage officer at a bank or with a residential mortgage broker.  For example, TD Bank is a big bank but they are a portfolio lender and keep their mortgages on their books.  They have a huge market share in collecting deposits (checking accounts, savings accounts, CDs, etc.) from customers in Canada; so, they need to do something with that money and they lend it and rather than sell the loans to Fannie and Freddie...they keep the loans on their balance sheet (i.e. "portfolio lender").  Most banks try to match the maturities of their deposits with the maturities of their loans so they reduce the amount of interest rate risk they take on.  Most lenders do not want to put 15 or 30 year fixed rate loans on their books because they can not collect fixed rate deposits or other borrowing sources with 15-30 year maturities.  Other lenders though are willing to take that risk or have other balance sheet management strategies to mitigate the risk.  Sorry, I went off on a tangent.

If you plan to get a blanket loan, you will be speaking with a commercial lender at the bank.

Hi Dante. Very good info provided above but as u know much of it depends on your goals. Give me a call sometime. I'd be happy to talk w u about your options and concerns. -Brad Bissett

Nowadays, Hard Money Loans are typically associated with short term deals; primarily the kind of loans made for flips. They normally only last between 12 and 24 months and carry a higher interest rate as well as points up front. When the numbers work for a flip, most investors are ok paying the higher rates when they have no other avenues to obtain the funding.

Long term loans and specifically lenders don't charge HML rates. Your rates will be higher than you see for owner occupied residential mortgages, but you can easily get a 20 to 30 year commercial loan with a 70% LTV on your commercial properties in the 5% range these days.

Just thinking outside the box here. You can consider a private investor to loan against your properties as well. That way you can negotiate your own terms that work best for you. 

@Dante Pirouz you mentioned that you have an LLC and you can get a loan through the LLC. Have you gotten a loan through your LLC yet? does obtaining the loan affect your personal credit? I am trying to get a loan through my LLC but I cant seem to get one without a personal guarantor on the loan?

@Dante Pirouz

Hi Dante

A portfolio lender is a lender who keeps their loans in house and does not sell to the secondary market.  I like using portfolio lenders, especially when you first start out. They are much easier to work with and much more flexible and can adapt to your needs.

I would try to focus on lenders who are on the smaller size and who are looking to grow

Gino

@Gino Barbaro Thanks for the clarification! We have had success working with portfolio lenders and now have 4 banks that we work with for deals! By the way I love your book and podcast!!

@Bernadeau C. We have used our LLC to refinance 5 units with a local Michigan commercial lender and while I am still the personal guarantor on that deal, the debt does not show up on my credit report so my credit score actually went up after the deal went through. The terms are not as good as you can get with a residential loan but I like that the property is now in my LLC's name. Hope that helps!

Originally posted by @Bernadeau C. :

@Dante Pirouz you mentioned that you have an LLC and you can get a loan through the LLC. Have you gotten a loan through your LLC yet? does obtaining the loan affect your personal credit? I am trying to get a loan through my LLC but I cant seem to get one without a personal guarantor on the loan?

 Non-recourse loans are harder to come by for single family properties. You'll definitely pay more with only the property as collateral. There may be other resources out there but if you check out @Dmitriy Fomichenko 's website, he has a list of non-recourse lenders that work with SDIRA's (which legally require non-recourse loans). Otherwise you'll likely have to sign as a personal guarantor on a commercial loan until you're much larger...or you're buying $1M and up commercial buildings using institutional financing. 

Originally posted by @Stephanie P. :

@Dante Pirouz

Go to the VP of Lending.  Explain your situation and he'll get you to the right person.  That way you get validation to his underlings that you're a person that should be taken care of and the bank will buy in more because one of the officers of the bank wants your business. 

Stephanie

Excellent advice right there! It's all about the relationship.