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 of your dreams. The problem though, to really create passive income for a dream retirement, you need a lot of solid rentals. Time, of course, is one of the biggest factors to being successful in real estate, but I also think you need to build a quality portfolio. 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 rental properties, 4 total properties including your primary. After 10 properties, 9 rentals, you will no longer qualify for rental property 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 Group, 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 credit unions, but exclude many of the large national banks. Portfolio lenders do not have a financed property limit, allowing you to own more than 10. Banks may not be the easiest to work with, but they can also close deals that conventional lenders cannot because they have the flexibility. This makes them a necessary 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. Bank appetites are constantly changing, making it very difficult to establish a great relationship which just one.
It is also important to know that banks can be more difficult to work with than conventional lenders, not only with changing guidelines but with speed of decisions. I have two very different experiences with two different banks over the last year. One got me approved and closed for a new construction loan in about 4 weeks, which is fast for a bank. It was a construction loan on a $1.3 million dollar house, and they loaned me eighty percent 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. It took them 7 weeks to get it closed! That loan seemed like a no brainer, but that bank is being more conservative right now, which made it a challenging process for me. I had a more recent experience with the same bank that did the construction loan. I had a loan all lined up for a six unit townhome projected I plan to build and the bank called me to tell me they are no longer interested in the project. Travis was working with the same bank on another project and they pulled the plug on him too. No warning, just a change in appetite. Now I am in a scramble to find a new bank for this deal.
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 or that they should not have any trouble with the loan, but that does not mean you are approved be any stretch. 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 sales person or in this case loan officer. In the conventional world, the loan meets the guidelines or it doesn’t, and a good loan officer will let you know right away if you will be approved or not. There is not a lot to discuss. Banks make decisions based on a number of things, which could include how they are feeling that day, so it is a much tougher target to hit.
This bank that just turned down my loan has done 4 other loans for me and even more for the referrals I sent them, we had a great relationship. Now that I am shopping for a new loan, it confirms that most banks want the relationship, which takes time to build, and can end with one phone call. It was a difficult phone call for the banker to make. The truth is, the loan officer has very little control even with the title “Vice President”, so we must be very cautious until the loan has a full loan approval from the committee. The best thing to do is to build multiple banking relationships that you can tap into. It is a constant task in this business because there is very little loyalty from the bank’s side.
Portfolio lenders are a challenging and necessary resource. They have flexibility and can get deals done that conventional lenders cannot, but it takes a lot more effort and you better have a plan B.