As I have been expanding my portfolio in different markets, I am have been evaluating different financing options (especially as I cycle through all my and my wife's personal mortgage slots as well as buying all cash).
In one of my main markets, I have developed a strong relationship with one of the regional banks there. They were willing to provide me a personal line of credit as well as issue a decent line of credit in the name of one of my businesses. They also are willing to make portfolio loans straight to my LLC. My game plan was to scale a bit by being able to use the lines of credits to continue to acquire and rehab purchases for my buy and hold portfolio and then when rehab was done do a cash-out refi portfolio loan to remove my own capital as the bottleneck.
Since I am about to potentially move forward on a couple of potential purchases I went over all the details with the bank today:
- The potrfolio loans can be issued in the name of one of my LLCs (so no more QCD)
- There is no seasoning requirement at all
- They offer fixed and variable offerings (and variable would be prime + 1 percent for me which is currently 4.25% total)
- They can do up to 90% LTV
Sounds great right? Well here seems to be the catch and I am not sure if this is typical:
- They only have a 15 year loan ammortization options, no 30 year ammortizations so that does affect annual cash flow compared to a normal 30 year loan I would use
- The property needs to meet their debt to income coverage ratio. Essentially Net rent divided by mortgage service has to be 1.4 or greater. They define net rent as total rent less 30% for vacany and operating expenses. And the mortgage is based as mentioned off a 15 year ammortization so that is not the easiest hurdle and that is why I am sure few loans actually happen at the 90% LTV and may end up closer to 50-65% to try and hit the ratios for SFHs (which I focus a lot on) but probably fine for Multis
My question is are these terms typical? Do most portfolio lenders only offer 15 year ammortizations (which I could see as similar to commercial loans where it is hard to get 30 year ammortization) or have some of you seen 30 year? Does the debt coverage ratio seem pretty high? I have seen 1.2, but maybe that is because they start their LTV at 90% and others start lower?
They did mention there a few ways around like using a different asset / collateral to cash out and then apply that cash to a purchase, etc.
Appreciate any insight. Wondering if I just figure out how to best make this work or if its worth the time to look at other banks in case people have seen better criteria / terms (would really like to use this bank as I have developed raltionship, but 30 year ammortization would obviously increase cash flow and annual return).
Those are commercial loans, so 15 years is not uncommon, but some lenders do 20 or 25 year loans. Some lenders may even amortize based on 30 years with 15 or 20 year term with a balloon. Recommendation: shop around with local banks and credit unions and some other regional players.
(Caveat - this is based on what I have heard on some podcasts and discussed by my local mentors in Texas. NY lenders may not offer similar terms in that market - but sounds like its worth asking around).
Thank you for the response and good advice.
This bank covers the southeast for my investing in Charlotte, Memphis, and other markets.
Typically portfolio lenders are only doing 15yr loans, charge 1% loan origination and IR in the 4.5% to 6.5%
We are working with one here in Memphis doing similar terms.
@Curt Davis Thanks for the response and hope you are doing well!
The nice part is they are waiving any origination points for me. On the bank side there really aren't any fees pushed to me aside from appraisal and other items they require to be completed (part of the fee waives are part of the relationship status they have designated to me on the personal banking side as well).
That said, does the bank you are working with have a 1.4 debt coverage requirement? And have you heard them applying a 30% deduction to the gross rent (for vacancy, maintenance, etc) seem in-line as well. My concern is that while they will do up to 90% LTV for me, in order to get to a 1.4, I would probably end up at a
@Eric Baum I had a couple portfolio loans on condos for around 24K each. I had a 7 year amortization. Cashflow sucked by the debt pay down was quick. Sounds like you will have a difficult time finding deal on those metrics.
@Eric Baum Those terms sound pretty darn good to me, if the fixed rate is decent. That net-rent ratio sounds reasonable as well.....if your payments are such that you are not hitting that ratio, I can see why the bank would consider there to be some risk, and not want to go to 90% LTV. I'd assume you can just lower the LTV/amount borrowed on a property until it hit their ratios......which if it puts you at 70-80% LTV is pretty standard for a portfolio lender anyways.
If you don't mind my asking, what are the fixed or ARM rates?
Thanks for the response. With the 15 year ammortization, I can still cash flow and part of that is due to interest rates being pretty reasonable, but I won't cash flow as much as I prefer and then it doesnt leave a lot of buffer for additional unbudgeted surprises. The flip side like you said is that you are paying down principal faster which I am ok with. Its the 1.4 coverage ratio that seems trickly when using 15 year amortization and 30% allowance. I'll have to see how each deal ends up and then what loan to value gets me within range.
I do agree that overall I thought the terms were really great aside from the 1.4 (I had heard that it should be closer to 1.2 particularly with a shorter ammortization). I also agree that I probably would never want a 90% LTV anyway - I am conservative (have a mix of financed and free anc clear properties) and while I like leverage I don't like to be over levered. I think my target would be to have 70% LTV (if I am purchasing and rehabbing correctly, at 70% I should have minimal capital left in anyway). That said, I could see the 15 year and 1.5 in some cases pushing me to the 50-60% LTV range which was a bit lower than I would like. If the ratio was 1.2, it would be minimal issue. That said, many of my deals would hit the 70-75% range and this may be good ammunition to stick to them, and almost an multi-family would hit this. However, there are some high quality / owner occupied neighborhoods that I purchase that have been consistent great returns (due to lower maintenance and vacancy due to area) that might struggle a bit.
Here is the cut and paste of interest rates:
The rate structures include fixed rate and variable rate options. The 15 yr variable rate would be around Prime + 1% (4.25%). For the fixed rate options:
4 yr balloon/15 yr amortization would be around 5.51%
5 yr balloon/15 yr amortization would be around 5.81%
@Eric Baum When I started accumulating multiple portfolio loans the amortizations were 7-15 year. Cash flow was OK but I had a end goal. My goal was to buy properties quickly and with portfolio loans and then refinance them into a better cash flowing product. Which I did this year into a commercial loan that cross collaterized a group of assets into a better cash flowing product and had the opportunity to pull out equity.
That makes a lot of sense. My plan has been to continue to build portfolio cash flow and I was constantly using personal loan slots and then paying off a mortgage to free another slot, etc. This helped me to grow agressively but also to not over leverage as I would have a mix of financed and paid off properties which reduces COC a bit as a percent, but increases magnitude of cash flow at lower risk. That said, the portfolio loans seem a great way I can finance straight to my LLCs (instead of personal and then quitclaiming) and no longer worry about slots. And the ability to cash out refi with no seasoning would allow me to take advantage of the equity I create when I buy and rehab so I could have my projects at one. I think 15 Year ammortizations will set me up even better for the long term, but wil require me to leave more capiatl than initially planned in each property and to have much lowered cash flow in short term - which is all fine but probably means I need to scale a bit slower than I maybe anticpated.
On the cross collateral loans (the bank was mentioning that as well since i have free and clear properties) - what are the advantages there? Were the ammortizations longer or the rates lower?
@Eric Baum The commercial loan I got was 65% LTV, 4.75% interest, 7 year fixed rate, 25 yr amortization. They basically refinanced 13 properties I had individual loans on and let me pull out equity up to the 65% LTV. It was a long bumpy process but well worth it. My cash flow increased and I was able to pull cash out to shop for new assets. I wouldn't do this with all your properties but if it is a piece of your portfolio then the risk is minimal, no riskier than walking across the street.
Thanks Frank. Those are great terms. And that is a smart startegy. Maybe I'll go forward on some of the potfolio loans and then down the road do something similar. I would love to eventually get the 25 year ammortization.
Thank you for all your insight.
@Eric Baum can I ask if you're willing to share the portfolio lender you're working with. I have some properties in Charlotte I'd like to roll up into one loan. Feel free to respond privately.
I sent you a PM.
We had a very similar situation. We dealt with one of the largest portfolio lenders in Denver, Colorado, and they provided us 15-year fixed rate loans, with 75% LTV. After we purchased & financed 4 investment properties, we learned that they had a 5/30 loan product where the loan had a 30-year amortization, but it was fixed only for the first 5 years, and then it was reset once a year (based on LIBOR) with an escalation maximum. On our 5th investment property purchase, we used that 5/30 financing option, and have been happy with it to date. However, we recognize that there is some interest rate risk after year 5 - but, given our long term view on interest rates, we are pretty comfortable with it. If you are comfortable with that structure & really want a 30-year amortization, you might check if your bank offers this type of product.
I hope that is helpful.
@ Eric Baum
Not to inundate you with requests for bank contacts - but we invest in the Raleigh area and would love to chat with them and see if they are lending up this way as well. Would appreciate any bank info/ contact you may be willing to share.
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