“Sorry, Brandon… you are too successful.”
Okay, that’s not exactly what they said, but that was sort of the truth. The bank was turning me down for a loan because I had too many properties.
It didn’t matter that I made more money in cash flow than that banker did in his job. It didn’t matter that I had been investing for years and had a sizable net worth. It didn’t matter that the deal I needed financed was incredibly safe from an “LTV” (loan to value) standpoint.
What mattered to them was that I was a square peg, and they had a round hole. I didn’t fit.
This situation happened several years ago to me and happens every day to investors across the world. We don’t fit into their mold for an “ideal borrower.” However, unlike those who say, “I can’t do it” and give up, I asked the question, “How can I do it?” and the quest led me to an awesome solution: portfolio lenders.
And it completely transformed my business.
Hey – this is Brandon, interrupting your regularly scheduled blog post to personally invite you to a webinar I’m doing THIS THURSDAY here on BiggerPockets. The topic this week is “House Hacking 101: How to Get Paid to Live (and Invest) for Free!” and I am PUMPED to be able to do this. So click here to sign up.
Okay, back to your blog post!
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
The Problem With Conventional Loans
Normal mortgages are known as “conventional.”
The conventional lending world is a little strange. You see, when a lender creates a mortgage for you, it’s actually fairly likely they will sell the loan.
In fact, that’s the primary job of most lenders: issue a bunch of mortgages, package them together in a big bow, and sell the loans so they get their money back. The most likely buyer of these loan packages are the two government-sponsored enterprises Fannie Mae and Freddie Mac, the nicknames given to The Federal National Mortgage Association (FNMA) and The Federal Home Loan Mortgage Corporation (FHLMC). The purpose of these huge pseudo-government institutions is to buy up mortgages from lenders so the lender can get their money back and can re-loan again.
As such, Fannie Mae and Freddie Mac, along with any other mortgage-buyer, wants to know exactly what they are buying so they have strict requirements on what they will and will not purchase as part of these packages. They will define specific rules regarding loan amount ranges, borrower credit score minimums, loan-to-value minimums, and more. To get a conventional lender to agree to fund your real estate deal, you MUST fit within these rules.
No square pegs allowed to fit in their round hole.
What is a Portfolio Lender?
However, not all banks operate the same way.
Some banks instead choose to hold onto their loans and keep the money in the community. These are known as portfolio lenders, and they can be a powerful ally for a growing real estate investor.
Because these portfolio lenders keep some of their loans “on their own books” (in their own portfolio of loans), they don’t have the same government-given box to try and fit you, the borrower, into. Instead, since they are only lending their own money, they can be a lot more creative. The maximum rule of four or ten properties? Not with a portfolio lender! The debt to income problem? Easily explained to a portfolio lender. Can you see how powerful these lenders can be?
Now, keep in mind, I’m not suggesting a portfolio loan is easier to qualify for.
A portfolio lender will still have minimum qualifications that you need to meet, and your loan will still need to be approved by the portfolio lender’s board or underwriters. Don’t think that a 520 credit score is going to work, and don’t assume you’ll be able to get a 0% down loan. In these categories, the lender might even be more strict.
But the rules are much more flexible, and you are likely dealing with a person, not a faceless corporation.
How to Find a Portfolio Lender
Before the real estate crash in 2007 and 2008, there were a whole lot more portfolio lenders operating in the US.
Today, you are going to have to search a little harder.
None of the “big banks” (the national ones with television commercials) are going to do portfolio lending. Instead, you’ll want to focus your search on small, local community banks. Look for banks that have a max of twenty different branches. Credit unions might also be a good source of portfolio lending.
Of course, portfolio lenders are not going to be labeled as such. No brochure in their lobby will use the word “portfolio lender,” no category in the Yellow Pages is going to list them for you. Instead, you’ll simply need to call them up and find out. In episode six of the BiggerPockets Podcast, investor Arthur Garcia did just this! He picked up the phone book, called every lender listed and asked, “Do you do any portfolio lending?”
Eventually, he found a great portfolio lender in his area, ironically based out of a Walmart! If you follow this strategy, just be sure to:
- Ask to speak with the loan officer because the teller will likely have no idea.
- Explain exactly what you mean since even the loan officer might not know the term “portfolio lender.”
Portfolio lenders often lend both conventionally AND through portfolio loans, so they can put you into whatever loan fits best. Also keep in mind, portfolio loans may be slightly higher in rate and shorter in term or have a balloon payment on the loan. (A balloon payment is a “due date” on a loan that is shorter than the amortized term. For example, you may have a thirty-year fixed-rate loan, but if there is a ten-year balloon, it means you must pay the entire balance of the loan off at year ten, most likely through a refinance.)
Fitting a Square Peg into a Round Hole
After hearing that initial “no” from the conventional lender, I went to a portfolio lender and never went back. A portfolio lender has been a great ally for me and completely transformed my investing business. I am no longer stuck with a maximum of just four loans. My debt to income is through the roof — and they understand!
I am able to sit down and talk with a rational person about the property I want to buy or refinance — and they don’t laugh me out the door because I’m a bit of a square peg.
Portfolio lenders have been incredibly helpful in my own investing career, and if you can build a solid relationship with a portfolio lender, I think you’ll find the same. So get out there this week and start building that relationship. Make some phone calls, visit some small banks, and take action to transform your future.
Have you used a portfolio lender in your business?
Let me know in the comments below this post!