Many real estate investors run into financing problems when they have ten or more mortgages. A portfolio lender can help investors finance more than four, more than ten or possibly 100 rental properties. I have a great local portfolio lender who will finance as many properties as I want, but my lender only lends in Colorado. Different portfolio lenders offer different terms and are tough to find in many areas. If you can’t find a local lender who will lend on multiple rental properties, there are national portfolio lenders who will lend on flips and rental properties.
How can commercial loans help real estate investors finance more than ten properties?
A portfolio lender can lend on multiple properties because they are using in-house loans that are considered commercial loans. Commercial loans don’t have to be used on commercial properties like the name states, they can be used on residential investment properties. Residential loans typically have much more regulations and stricter guidelines than commercial loans. In the past, investors looking to finance more than ten properties have had to rely on local portfolio lenders, but there are now companies offering commercial products for investors looking to finance many properties who lend nationwide. I am in the process myself of deciding if I want to refinance 8 of my rentals with one of these lenders.
The national companies are primarily funded by hedge funds. They tend to lend based on the properties and not the borrower.
What type of loans do the national portfolio lenders offer?
The national lenders offer many types of loans from 5 and 10 year ARMs to 30 year fixed rate loans. The amortizations differ and the rates and terms differ based on the company and the properties that are being borrowed against. Many of these funds also offer hard money loans as well for fix and flipping. However this article focuses on the rental property investment side. You can find more information on hard money loans here.
How do national portfolio lenders differ from local portfolio lenders?
The loans I get on my rental properties are very similar to a residential product, even though they are a commercial loan. The loans are ARMs with a 30 year amortization, no prepayment penalty, no balloon payment and they have great rates under 5 percent. My local lender does not offer 30 year fixed rate loans and many local lenders will not offer a 30 year amortization.
The national companies offer ARMs as well as 30 year fixed rate loans. However, the interest rates are higher (6 to 8 percent) and there may be more fees associated with the national lenders. The national lenders tend to be more willing to lend in larger loan amounts and offer blanket loans that cover more than one property. Some local lenders will be hesitant to loan too much to one investor, where the larger lenders are more flexible.
What is a balloon payment and how does it affect rental properties?
Some of the national and even local lenders have balloon payments on their loans. That means after 5 or 10 years you have to pay the loan back. If you choose a loan with a balloon payment you must have an exit strategy. Many lenders say they will work with investors and figure out a way to finance them again in 5 or 10 years, but there is no guarantee. Commercial loans can be very risky if they have a balloon payment. We also do not know what interest rates will be in five years, and it may not make sense or be possible to refinance in 5 or 10 years if rates rise significantly.
An investor has to have a backup strategy to pay off these loans when the term is over. Using cash flow to pay down the loan may be an option. Investing cash in other high yield investments may be another option. You could also keep a portion of your property portfolio without loans. In the worst case scenario you could sell houses to pay off the loan at the end of the term.
How do the national lenders determine how much someone can borrow?
The national lenders will have the same basic lending guidelines with slight differences. They tend to lend 75 percent of the value of homes, but the houses must have decent cash flow.
- The loan to value ratio is calculated off appraisals on each house and the investor has to pay for the appraisals.
- There could be prepayment fees on the loans if you pay them off before the term is over.
- DSCR stands for debt service coverage ratio and must be 1.2 times the mortgage payment. The DSCR is figured differently on each property, but the cash flow would be based off of the rent minus taxes, insurance, vacancy, maintenance, HOA and any other costs.
- Recourse and non recourse loans are available. A recourse loan means the bank can come after your personal assets if you default on a loan. Almost all residential and most small commercial loans are recourse loans.Some large commercial loans are no recourse, which enables limited partners to invest in a large property without fear of losing their personal assets as well as their investment.
- There may or may not be seasoning periods for refinancing properties and taking cash out.
Who are some of the companies offering these loans?
There are a few large companies offering portfolio loans to residential landlords. The two companies that I think have the best programs are:
Jordan Capital (I tried to complete a refinance with Jordan Capital and they dropped the ball big time)
They both offer 30 year fixed loans at decent rates and were very responsive to me. Some of the other national companies only offer ARMs with balloon payments and are tougher to get any information from.
What option is best for the investor looking to finance more than 10 rental properties?
In my opinion I love my portfolio lender and I think they are the number one option if you can find one in your area. If you can’t find a portfolio lender, or you have a large number of properties you want to refinance, the larger portfolio lenders may be a better option.
For more information on how to buy the best rentals, which will make the most money, check out my best-selling book: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.