Using A Portfolio Loan For An Investment Property: A Guide For Real Estate Investors
Should you use a portfolio loan to buy an investment property?
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If you’re a real estate investor with a nontraditional financial profile or rental portfolio, you may have to turn to alternative methods of financing. One of those methods is getting a portfolio loan. Below is a guide on using a portfolio loan for an investment property. Keep reading to learn more.
What Is A Portfolio Lender
A portfolio lender is a bank or other financial institution that originates mortgage loans and then keeps the debt in a portfolio of loans. Unlike conventional loans, a portfolio lender’s loans are not re-sold in the secondary market.
A portfolio lender generates fees from originating;mortgages and profits from the net interest rate spread between interest-earning assets and the interest paid on deposits in their mortgage portfolio.
Live And Breathe Numbers And Understand The 1% Rule
You must know your numbers. Track every expense and identify which numbers rise to the top and know the numbers you need to work on. Know the 1% rule, a rule of thumb for measuring the price of the investment property against the gross income it generates. You can use it to quickly determine how the property should generate cash to make you money or help you determine what you should charge in monthly rent.
Also, make sure you know the financials of the following items:
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Real Estate Mutual Funds
Real estate mutual funds invest primarily in REITs and real estate operating companies. They provide the ability to gain diversified exposure to real estate with a relatively small amount of capital. Depending on their strategy and diversification goals, they provide investors with much broader asset selection than can be achieved through buying individual REITs.;;
Like REITs, these funds are pretty liquid. Another significant advantage to retail investors is the analytical and research information provided by the fund. This can include details on acquired assets and managements perspective on the viability and performance of specific real estate investments and as an asset class. More speculative investors can invest in a family of real estate mutual funds, tactically overweighting certain property types or regions to maximize return.
Residential Vs Commercial Loans: Whats The Difference
Summary: There are a variety of financing options available to real estate investors. In this post, we cover the two most common ways to finance your next purchase and highlight the key differences between residential vs commercial loans. In a future post, we will cover alternative or more unconventional sources of funding.
So youve decided to become a real estate investor. You have some money in the bank, but not enough to purchase the property you want outright.
Besides, you understand the power of leverage. You know part of the advantage of real estate over the stock market is the ability to make money on someone elses money . Plus you also understand that your cash-on-cash return will be much larger if you buy using a loan rather than paying the full price out of pocket.
So you want to borrow some money to buy. But;where do you begin?
In this post we cover the the two most basic financing options for your real estate investment properties: residential and commercial loans.
Since this could be considered a dry topic by some , well make it more interesting by ending with with a head-to-head comparison of the two financing options. Lets get into residential vs commercial loans!
Residential loans for investment properties
A residential loan is a basic loan, similar to the one you get on your primary residence. The main differences are that you have to put more money and your interest rate will be higher.
More on Residential loans
The commercial loan
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Make Your First Purchase
Now that you have a real estate investment business plan, its time for the most exciting part of your real estate investment journey. This is where youll make your first property purchase. Buying the first property the right way means youll have the opportunity to buy your second property much sooner.
Start searching for properties available in the market and follow your investment strategy depending on the type of properties you want to start with. Use the internet to find properties near you or in the city you want to invest in. Make sure you follow all the right rules and work with professionals like real estate agents and financial advisors to ensure you make informed decisions.
Financing Commercial Real Estate In Canada And The Us
Paramount to the program is our commitment to work alongside those we finance to help them achieve their goals. We offer a range of mortgage products and loan amounts, and provide prompt execution and industry-leading service, which distinguishes our ability to initiate new business relationships. We are responsive and seek to expand our relationships over multiple years and transactions.
The current portfolio and potential lending opportunities focus on four areas:
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Reason #: When You Dont Want The Purchase To Show Up On Your Credit Report
Believe it or not, portfolio loans often dont show up on your credit report. Youll want to discuss this with the lender prior to taking out the loan if this is your primary motivation for wanting one, but many lenders dont report portfolio loans to the credit bureaus.;
This could be a decent strategy for a variety of reasons. Say, for example, you know youre going to need a personal loan for your business in the near future, but you want to jump on an investment opportunity thats appeared on the market. To capitalize on the situation, you use a portfolio loan. With it, your credit score wouldnt change, leaving it in a stronger position prior to you taking out the personal loan. The personal loan would thus have a better interest rate, meaning it wouldnt cost you as much to pay off.
What Type Of Loans Does A Portfolio Lender Offer
Since a portfolio lender is a local bank that lends their own money, they do not have to meet Fannie Mae lending guidelines, which allows them more flexibility. However,;they do not offer all the loan programs that large banks offer. My portfolio lender does not offer a 30-year fixed mortgage. My portfolio lender only offers a 15-year fixed, 5/30 ARM, or 7/30 ARM. To get;the lowest;interest rate, I use a 5/30 ARM on most of my rental properties. Here is a great article with more information on ARMs. Each portfolio lender has;different terms and loan programs. I can put 20 percent down on as many properties as I can qualify for with my portfolio lender. Some local banks require 25 percent down, some will only offer 25 or 20-year amortizations, and some have higher interest rates. If you are looking for a portfolio lender, make sure you shop around to find the best terms.
A portfolio lender will also want you to have all your accounts and money in their bank. This is usually not a big issue for most people since a portfolio lender will have very competitive programs and products that align with the larger national banks. The better the relationship you build with a portfolio lender the better loans you will get.
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The Millionacres Bottom Line
The flexibility of a portfolio loan can be a big win for investors or homebuyers who are struggling to obtain financing elsewhere, but borrowers should fully understand the financial commitment they’re making when seeking financing through this type of loan. For the right investment, the higher interest rates and fees can pay off in the long run.
Why Use A Portfolio Loan
Bad things happen to good people all the time, especially if you take into consideration the economic turmoil of the last 7-9 years. ;It’s these temporary hardships that prevent otherwise qualified, responsible and capable borrowers from financing your next real estate purchase, or refinance.
Time cures all financial hardships, and time also diminishes the return on investing in real estate. ;The most significant reason for using a portfolio loan is to shorten that time that you’re out of the market while you’re waiting out the timeline until you can secure more traditional, lower cost financing.
While the upfront costs, and interest rates do tend to be higher than traditional and conventional financing options, when you consider the fact that you’re only “renting” this money for a short period of time, the numbers will speak for themselves.
When you compare the cost to borrow money to purchase a home, with the cost to borrow money for almost anything else, home loan interest rates are significantly lower than most;installment loans or credit cards.
Most purchases you will use financing for will never appreciate in value, provide shelter, or build wealth. ;When you put all of these factors into perspective, it is difficult to argue with the fact that even though it’s a little more expensive up front, the return on this investment is difficult to match.
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How Does A Portfolio Decide Who Is Denied Or Approved
When I first went to my portfolio lender I was told that I did not have enough experience and they could not help me. I was obviously frustrated and had was not very impressed with the lender. About a year later someone introduced me to the same lender, but a different loan officer. They were amazing and happy to help me. I could not believe how easy it was to get a loan!
That showed it was not about the lenders guidelines, but about the relationship and the person helping me. They care about credit scores and incomes, but not as much as many big banks. If you have a good relationship with them you may be able to get some loans done that the big banks cannot do.
Is There A Typical Set Of Loan Terms That Come With Portfolio Loans
There isnt anything typical with a portfolio loan. Each loan is unique. It depends on your financial profile, the condition of the house, and the purchase price.;
There isnt an algorithm or a given score that borrowers must satisfy, says Ted Lyons. And normally, the loan application goes to the highest levels within the bank, and its a discussion a bet where the bank tries to understand the circumstances that exist with the loan and what makes the most sense.;;
Here again, portfolio loans are common sense loans. Banks are going to come up with terms that make sense for them, and hopefully you, too.
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How Portfolio Loans Work
Portfolio loan standards can differ from Fannie Mae, Freddie Mac and government-insured loan requirements, which could help borrowers having difficulty getting approved for other more common types of loans. The benefits may include:
- The size of the loan doesnt have to meet conforming loan limits.
- The lender can set any down payment requirement.
- Private mortgage insurance may not be required, even if youre making a small down payment.
A portfolio loan can be attractive to borrowers in some situations.
- Lets say that a period of bad luck pushed down your credit score maybe youve had a few months of low income or unemployment, or both. Financial hits like that dont look good on paper, so you may not be able to get a typical mortgage. If you have a history of solid credit and consistent income otherwise, however, your bank may agree to offer you portfolio financing for a home, and with more flexible underwriting.
- If you own a local business , a bank may also offer you a special deal in the form of a portfolio loan. Why? If youre a business owner, banks want the accounts tied to your business, and to foster a relationship with you. For the bank, a portfolio loan is a way to generate more business, so they may offer you a mortgage for your home with an attractive interest rate, little down or jumbo financing.
Because of this, portfolio loans generally go to the lenders best customers the ones most likely to generate lots of future business.
What Is A Loan Portfolio
Loan portfolios are pools of loans that banks, investment firms or even government agencies own and manage. Loan portfolios are assets because of the recurring revenue that the loan payments create. However, a loan portfolio can also put a business in financial peril if large numbers of borrowers default on loan payments.
Together, all of the loans held by a business or bank are referred to as a loan portfolio.
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How To Obtain Real Estate Investment Financing
One of the biggest misconceptions of real estate investing is that you need to have a lot of money to get started, which isnt true. However, the secret that many professionals dont understand is that there are many different real estate financing options available to fund every investment. Because the method in which a specific deal is funded can greatly impact its outcome, understanding the financing aspect is imperative.
As an investor, there are a few different ways to go about financing real estate investments. Each one will have its own set of pros and cons, and your financing approach will depend on the property and the situation. Beginner investors need to remember that not all real estate investment financing options are created equal. What works for someone else may not necessarily work for you, but the trick is understanding which real estate financing option will compliment your business strategy. By taking the time to research the various real estate financing options out there, new investors are sure to realize how accessible investing can be. Broadening ones toolkit of real estate investment financing options is simply a matter of being knowledgeable about what strategies exist, as well as proper ways to leverage them. Keep in mind that all investors have faced the financing hurdle at some point in their career; when in doubt, there is nothing wrong with tapping into your investor network and ask for advice.
Acquire More Properties Over Time
Growing your portfolio involves purchasing more properties over time and adding them to your portfolio. The trick here is to purchase one property at a time because if you juggle multiple properties that need to be renovated, then it can be hard. You may not have enough finances to complete all the projects, and it may just leave you stranded.
Use the right real estate investment tools to keep the numbers straight and in order. You can use the snowball method, where you use the proceeds of the first property to purchase the second property. Alternatively, use the 1301 exchange or the;BRRRR strategy.
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Find The Best Portfolio Mortgage Lender For Your Needs
To find a portfolio lender that can best meet your needs, you should consider the following:
- Your credit score and credit history: If you have a better credit score, youd likely have more options and be able to negotiate for more favorable terms.
- Qualifications: Borrower qualifications and property conditions can affect eligibility and interest rates.
- Loan costs: Consider all the costs associated with taking out the loan, including loan origination fees, closing costs, prepayment penalty and appraisal fees.
- Terms: Available repayment schedules can span from 1 to 30 years and they impact the amount of interest youll pay.
- Funding time: Make sure that the time to close and fund the loan will work for your schedule.
- Loan amount: Most loans have a minimum and/or maximum loan amount. For example, balance sheet portfolio loans typically have a minimum of $100,000 and no maximum while jumbo portfolio loans have a minimum of $484,351 and the maximum varies by state.
You May Be Able To Finance Your Entire Rental Portfolio
Unfortunately, Fannie MaeandFreddie Mac put limits on the number of loans that one borrower can hold at the same time. Once you have more than ten properties financed, you will have to look into those alternative methods of financing.
However, a portfolio loan can give you the option to finance multiple properties in your rental portfolio with one mortgage loan. After all, a blanket mortgage, which allows you to finance more than one property at a time, can often be a type of portfolio loan.
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Where To Find A Portfolio Lender
Portfolio loans inherently have more risk for the lending institution than other types of loans, and the lender knows to adjust the interest rate or fees they charge to reflect the amount of risk they would be carrying. If you’re looking for a portfolio loan, start at your own bank or credit union. Having an established relationship and history with the lending institution will increase your chances of being approved for portfolio financing.
If your bank doesn’t offer portfolio loans, try visiting the local credit union or searching online for the nearest lender. Compare rates, fees, and terms with other portfolio lenders, or if preferred, secure the services of a mortgage broker to help compare the rates and terms for you.