What are the best practices for obtaining portfolio loans?

6 Replies

I am currently doing a cash out refinance on my primary home and using the cash to fund the down payments of my first two investment properties. All three of these use a conventional loan. I will not qualify for another conventional loan until I can show a rental history which will be several months away.

I have purchased a third property with a partner and am actively looking for other partnerships. Meanwhile, I plan to seek out opportunities with local banks and credit unions for a portfolio loan.

1. What are the key elements should I prepare to present when I pitch to these local banks?

2. Do these banks typically require 20% down? Or will they finance the entire purchase price?

@Brandon Pace Thanks for posting. It sounds like you're building yourself a nice RE portfolio. To help answer your questions, the key elements that most banks and CU's will want to see depend on their underwriting priorities, e.g. credit/collateral/cash, which they will use to ascertain your ability to cover the debt. With traditional lenders, it usually comes down to how much liquidity you have. Since mortgage insurance doesn't cover investment properties, you'll have to put down at least 20%. As you probably already know, you'll also have to have several months cash reserves for each property. Alternative lenders and investors have different guidelines and may be more "investor friendly" when considering financing a deal. I hope this helps!

Thanks for your feedback. I do not currently have down payment money but have some collateral. Could you elaborate on some ideas on who and what types of alternative lenders are in the marketplace? What lending do you specialize in?

@Brandon Pace

Step 1: Get your personals financial statement together. This will be a one page spread sheet that shows your assets and liabilities and your income. I'd do it for the past three years. Have your past three years of tax returns too. Have your schedule E be easily seen too. Make up one page summaries of all your properties with before and after pics if you made changes, the P&L for that specific property. Also have the leases in there too. 

Step 2: Find a bank that loans on portfolios of SFRs. Sounds dumb, but not all banks want to keep those loans on their books. Call and ask if they have an appetite for what you want to do. 

Step 0: ask yourself what difference a few months makes and if you really need/want this loan. The difference in rates on these loans will be significant and you will tie up all the equity when you make a portfolio loan, meaning even if you sell on, you may not be able to get the cash out. 

Thanks Bill. Your feedback is helpful. Could you clarify Step 0? What do you mean by asking myself what difference a few months makes and if I really want to do this loan? Are you inferring that the interest rates are higher on a portfolio loan? And what do you mean "sell on, you may not be able to get the cash out"?

@Brandon Pace  I meant "sell one" if you have three rentals all in one portfolio loan and you sell one, the terms of the loan could make you pay down the balance instead of getting the cash to use yourself. 

I'm not inferring that the rates will be higher, I know they will. Its a fact. Your residential loan can be sold to a government sponsored entity (Fannie Mae, Freddie Mac). Commercial loans don't have this, so the risk is higher and thus the rates are higher. The rate you'll get depends on a lot of different things, but it will easily be 100 basis points higher than you on a  residential mortgage. Granted resi rates are at 2.5-3% so that's not terrible, but if you have marginal deals, it could make a difference. 

Look into the rates you'd pay and see if it wouldn't make more sense in the long run to rack up some rental history and keep getting conventional loans. 

Relationship, relationship, relationship. Establish a relationship with a local commercial/investment lender and keep that relationship going. Portfolio loans become much more accessible when you know a lender personally.

Obviously lending laws are at play but there is more wiggle room in bank comfort when you know the lender. Then the underwriting priorities kick in and you have to meet minimum qualifications.