I Used Portfolio Lending to Transform My Business. Here’s How You Can, Too.

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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.

—–

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—–

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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.

Related: Confessions of an Ex-Banker: How to Get Your Next Loan Approved, Guaranteed

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.

Related: Investment Property Loans: The Ultimate Guide

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:

  1. Ask to speak with the loan officer because the teller will likely have no idea.
  2. 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!

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

35 Comments

  1. John Bierly

    Brandon –
    Do you have any portfolio lenders to recommend in western Washington? I’m in Kitsap county and am running into the same problem – good properties with positive cash flow but in the conventional lending world they count as liabilities and not assets since I haven’t held them long enough.
    John Bierly

    • John,

      I asked some local real estate investors and realtors who were listing and selling lots of rental properties who they used for lending. That is how I found the 3 banks in my area who give these types of loans. I would recommend that you ask others who are purchasing how they are getting financing. If you hear the same bank over and over, then that’s the one!

      Make an appointment to talk to the loan officer and explain what you want to do. Ask them what kind of loan would work, and they will be able to tell you what loan they think would work best for your situation.

  2. Frank Romine

    Brandon good Topic. A key to keeping a good “Portfolio Lender” is relationship banking. Lenders will want you keep deposits with them. Be prepared to pull the plug if they restrict you after a handful of loans. I had to jump around with multiple portfolio lenders because they cut me off. When you are in accumulation mode have the Grant Cardone “whatever it takes” mentality.

  3. Definitely develop a relationship with at least 2 portfolio lenders. I began with one small local bank. After I purchased my first 7 properties in 2 years, they told me they thought I should slow down. I then went to bank # 2 and purchased another 45 units.

    After 20 years with them, they were insisting on an 8% interest rate on my apartments until I told them I was going to check with my other bank. Then they decided they could give me 4.7% instead. Amazing what a little competition will do. Also, you never know when your bank will change leadership or face new government regulations and you don’t want to be left out in the cold. Once you have a long-term relationship with a couple of portfolio lenders, they will trust you and then you can usually work out a favorable arrangement for financing, even on properties that do not fit the normal lending criteria.

  4. OK, you are on a roll.
    Yes, I have used this method, arranged for me by a very clever mortgage broker that I really only did because they made it possible. I refinanced the balloon early and did a rehab with the money but I somehow forgot where that money came from and wound up with the one property over leveraged by not paying it off from the rehab {my bad }.
    I would read the other related articles but it’s past my bedtime and a school night.
    Thanks for some really good schooling right here !!

  5. Seth Greiner

    Great article Brandon! I was searching for a line of credit on a rental shortly after buying it with cash and was told no multiple times over. After reading up on many similar situations on BP I started calling around for portfolio lenders. I found one and am several days away from getting a sweet line of credit from the property 4 months after purchasing it using the appraisal value.

  6. Texxxxxxxxxx on

    Great article Brandon…so a follow up question.

    What are the “normal” terms that you (or anyone else here…please jump in!) see when using a portfolio lender.

    I would assume these, but please correct/add/delete:
    -Good credit +700
    -minimum 20% down (or more-25% rings a bell for some reason)
    -willing to use other properties as collateral (even 2nd/3rd positions???)
    -cash reserves-(locked at that lender I would guess) and how much??6mos??
    -2 years tax returns (to show history in business/job?? ie. stable income)

    All I can think of right now…I’m sure there are more/others/revisions….please feel free to elaborate….eager to learn more about this subject. Thanks again for a great article!

    • Brandon Stevens

      Those would all be the correct assumptions.

      My port lenders only need credit 650, 20% down, 3 months cash reserves and your typical loan appl.icant paperwork taxes, financial statement, etc..

      They do not require me to have an account there.

      Many banks in our area lend like this and I use a number of them, they don’t care if you have 5 loans with bob, and 7 with jeff, and 3 with chris.

      Your financials are looked at as a business, if you can show on paper you know what the hell your doing and pay people back it typically works out.

      Obviously every bank has their own requirements.

      One thing Brandon didnt mention is when shopping for one, I almost always ask if that loan officer owns rental property. I think its almost imerative, sure they might know loans, but do they know your goals? What your trying to accomplish? If they own property they understand, they understand how to present what you want to do to someone and they’ve been there! SO SO SO IMPORTANT.
      Most my lenders give em 5% with a 5/20 arm.

      Hope this helps.

      • Texxxxxxxxxx on

        Fantastic info Brandon! Exactly the kind of details that help make sense of what is expected by lenders.

        There was another follow up question that asked what kind of stuff to bring to a lender when submitting an application…any thoughts on that?

        I remember reading awhile back about making a folder/portfolio with financials, photos of properties owned (as well as property in question), etc. do you/have you (or anyone else out there) go to that amount of prep or is there a point where the lenders just want a regular submitted application?

        Thanks again for your response!

        • Brandon Stevens

          When I meet with a lender for the first time I have a have a nice binder with all of my information.

          This information includes my financial statement, two recent payroll deposits, two years of taxes, my current rent roll, and a break down of each of my properties to include (mortgage payment amount, rent amount thus showing cash flow)( amount owed on that note and the appraised value of the home, thus showing equity)

          The last item is many times bulked somewhere on your financial statement and having it all broken out keeps the lender from having to do all of that work and asking you a million questions.

          This amount of prep is not really necessary for me anymore but I do it anyways, I like to know where I’m at everytime I need something. Most importantly though I think it shows you are serious and that you know what your doing . Thats who these people want to lend to. Not bob who thought itd sounded good to have a couple properties, doesn’t really know what he makes or loses or “i don’t know what its worth” “I think I can get this much rent but I dont know” “Im not sure what I owe..lemme get back with you”….I’m not saying bob won’t get the money once he finally gets everything he needs to the lender but in that situation if I’m a LOCAL lender, i migh t be concerned because this is our $, our portfolio, not a package to pawn off on someone else.

          If I have a property in mind, I run the numbers on it for them basically like you get from the analyzer BP offers and I put it at the end. By the time they get to the back of the folder, they’ve seen I’m not an idiot, I know what I’m doing, and every property I own makes money. Then they see the one I want, and I’ve already show them it will make money and their money will be safe.

          The first time is always the hardest, but once you get in, you show after a few properties your not an idiot, the questions get easier the process gets shorter and your on your way.

          It took me a couple years to even just ask after I got to 4 proeprties and got told no once. My credit wasnt great, business was a little slow, frankly i was ashamed to even ask because I didnt “feel worthy”. The truth was I had no idea what I needed to move forward, I had no idea what they wanted/needed/required/looked for. I hate myself for wasting those couple years, I hate thinking I could have had or six more properties over that time and an extra million bucks in equity today….. bottom line, don’t wait. Get everything you can together, make it look nice, pack up the car and drive around and talk to the lenders at every local bank. There are good people in those community banks, and they want to lend money, thats how they make money. If they’re not comfortable giving you money then they’ll tell you what to do so they will be….once the doors open, the rest is on you! GL

  7. Pavel Sakurets

    The easiest way to find a bank that would lend you money on your real estate deals (assuming you have 4 properties already) and btw I would not recommend to have any properties or mortgages except your personal residence under your own name, because when you decide to sell your own house and buy a new one and get a mortgage, you will need 6 months in reserves for all your properties (mortgage payments, insurance and property taxes) sitting in your checking or saving account for 2 months before you could qualify to purchase a new home.
    For example if you have 5 properties and average pmt is $1,500/month you will need 5x$1500x6months=$45,000 on the account to qualify for a new purchase and you can’t just transfer money to the checking account, money has to be there for 2 months.
    Back to finding lenders:
    #1 ask your local REA group who have more than 10 properties and who they got financing from
    #2 If you have access to MLS, look which investors bough/sold properties that were financed to LLC and which banks financed them
    #3 get a list of state chartered banks (not BIG banks) and call them and ask if they will finance more than 5 properties for you. I did this in 2008 when banks stopped lending.

    • Texxxxxxxxxx on

      Congrats Sean,

      Question for you…other than the fact that the time frame is shorter…which I guess could lead to refi fees down the road/and a slightly higher pmt….is there some other reason why you feel this was a “a bit more risky” or is the 2 things I mentioned the only worry?

      Also, I assume this is for a lease/hold type of property….my assumption would be that as I would also assume that if your plan was to sell it at some time in the next 5 years the loan terms wouldn’t be risky….or am I all turned around???

      Congrats again on your closing.

  8. Matthew Buttner

    My question is, what do you do when the balloon payment becomes due or the ARM rate starts increasing? I mean, the whole point of the loan is to pull cash out to purchase more properties, so what if the cash isn’t lying around when these things start to come due? Do you ask for a refi?

  9. Sharon Tzib

    Every portfolio lender is different. Mine in Texas only requires one year’s worth of bank statements, no tax returns, 700+ credit and 25% down. If you are buying owner occupied, he can do 560 or above on the credit score. And he does not require you to open a bank account. I found him on Linkedin. So yeah, pays to shop around for terms and requirements.

  10. Sonny Smith

    Great article Brandon. This was my story too. I have been putting off buying another rental because I had been turned down for conventional financing by some of the bigger banks. After reading this article, I was encouraged, and started calling some of the smaller local banks in my area, and got approved for a mortgage yesterday!

  11. Michael Zerivitz

    Banks are very picky when it comes to portfolio lending. A loan officer must be pretty sure that the loan will be a good one- or he/she will be facing an unhappy loan committee.

    An alternative is to find a hard money lender who can also offer a long-term re-finance of the short term loan. These are much much easier to find than a local bank who will lend to a real estate invetor.

    It works like this…. you approach a local hard money lender and he/she finances the purchase of the property. After an appropriate seasoning period where you make all of your payments on time (usually 12 months) you can re-finance in to a long term, lower interest rate mortgage.

    Your cash flow immediately improves and you are now ready for your next deal.

    Hope this helps!

    – MZ
    (www.HardMoneyDoctor.com)

    • Chris Martin

      If you have a sizeable net worth, the big wealth managers operate nationally, e.g. The Private Bank from Wells Fargo. But as pointed out in the blog, for the masses, the ‘portfolio lenders’ will be the commercial lending side of the small local or regional lenders (banks, credit unions, etc.)

  12. Ronen Elrom

    Great post, thank you!

    Someone mentioned not to keep any property except for your primary residence under you name… Can you elaborate on how to form the holding structure to count for liability, financial options, manageability, taxation, etc.?

    I know this might be along answer, especially taking all the limitations added after the 2008 collapse.

    Thank you!
    Ronen

  13. Alex Vargas

    Hey Brandon,
    I heard you say on a show with the real estate agent from NJ that invest in Duplexes. that you get private money to purchase your investment properties the use a portfolio lender to refinance you. how long do you hold the property before you go for the refi?

  14. John barnette on

    First Republic Bank is good to work with. Sf based but operate in many California markets, Florida, maybe the Northwest? They like grade A borrowers. Conservative but will do large large loan amounts. They did several cash out refi of sfr’s and condo. Have a portfolio of 9 and can’t do cash out with conventional…so First Republic. They wanted to keep me at 65% LTV and I have a 780 fico. But larger SF dollar amounts. Good rates with autopay through their checking. 10 year ARM products. No 30 yr fixed.

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