Do you have aspirations of owning a real estate empire? Do you dream about being able to retire and live the life of your dreams because you own rental property?
If you are like me, you are counting on real estate to create the life you want to be living. The problem though, you need a lot of good properties for this to work. Time, of course, is one of the biggest factors to being successful in real estate, but I also think you need to build a portfolio of good properties. Even 10 properties might not be enough. Fannie Mae makes it extremely difficult to keep buying rentals and even changes its underwriting guidelines once you own 3 properties, 4 total properties including your primary. After 10 properties, 9 rentals, you will no longer qualify for loans. So how do you build a portfolio of rentals when your largest source of capital cuts you off? You need to build relationships with portfolio lenders.
Technically, a portfolio lender is any lender that will keep the loan in their portfolio. Hard money lenders, like Pine Financial, are technically portfolio lenders, but that is not what we are talking about here. Often, portfolio lender is a term used in the industry that means community banks. Banks that keep the loans they originate are not tied to the Fannie Mae guidelines. This will include all the small local banks and typically will not include the large national banks. In fact, as a real estate investor, I would recommend you not have accounts with the larger banks and try to only work with local banks. They do not have a number of property limit, and will allow you to own more than 10. They can also close deals that conventional lenders cannot because they can be more flexible. Can you see why it is important to know about this source of capital?
Each bank will be different and each will have its own appetite for loans. One bank will want loans on rental property while others will not. Each loan the bank owns goes into a category, and the bank is regulated and forced to keep those categories in balance. They are not allowed to have too many of any type of loan. This makes it tough for us, because bank appetites are constantly changing.
Banks can be much more difficult to work with than conventional lenders. Surprisingly, they are typically much slower. I have two recent experiences with two different banks. One got me approved and closed for a new construction loan in about 4 weeks, which I thought, was fast for a bank. It is a construction loan on a $1.1 million dollar house, and they loaned me 80% of the costs. Another bank, which I happen to have a more personal relationship with, approved me for a $318,000 loan to exercise an option for a property that is worth $600,000. I gave them the loan 6 weeks ago and it is supposed to close next week. As of yesterday, they were still asking me questions. That loan seemed like a no brainer, but the bank is being more conservative right now, which made it a stressful process for me. There were a few times that I was not sure the bank would do the deal, which of course made me nervous, as I have a lot of equity at stake.
When you start to deal with portfolio lenders it is important to know how the process works. I am simplifying this, but every bank follows a similar process. The loan officer, they call themselves vice presidents, will gather your information. Depending on the complexity, they will take a
few days to a little over a week to get that done. They might even tell you that everything looks good, but that does not mean you are approved. Once the loan package is ready, they call it ready to present, the loan goes to the loan committee to approve. The loan committee will likely meet once a week or once every two weeks. If you, and by you I really mean the loan officer, misses the meeting, they need to wait for the next one. You will have no contact with the committee, so it feels like the used car sales strategy. Your only contact will likely be with the loan officer. In the conventional world, you will typically have one underwriter making the decision on your loan, sometimes it is even a computer that makes the decision. In the conventional world, the loan meets the guidelines or it doesn’t. There is not a lot to discuss. Although you won’t have contact with the underwriter, your loan office likely does, and can ask questions for you and get your loan approved quickly.
With my most recent deal, I knew I had a little over 6 weeks to close on my option. I sent everything to the bank and asked them to let me know if they see any issues within a week so I can move the loan if needed. It is now 6 weeks later and I am not closed, and they are still asking questions. I have a lot of money on the line, so you can see why I say it was a stressful process. Luckily I have
always had a plan B, but it would be nice if this particular lender was easier to work with. The truth is the loan officer has very little control even though he is a vice president. The truth is, he did not pay attention to the file like he should have and my situation is more complicated than he was ready for, even though I explained that upfront. The truth is he was not worried about my deadline. The truth is he gets paid a salary so there was not the appropriate amount of incentive to get it done.
The truth also is portfolio lenders are a necessary resource because they have a lot of flexibility and can get deals done that conventional lenders cannot.