07 Apr Real Estate Q&A: Portfolio Loans
Welcome back to the vlog everyone! Today, I’m going to be answering a question I received a while back from Justin regarding real estate. Let’s see what he’s curious about:
I want to ask questions about doing a portfolio loan to fund the next several properties.
I have talked to 2 of our local banks where I know the officers and they know me well too. Both have said they would be willing to do a line of credit with the properties I already own and to just come in and tell them what I want to do and they will work it out. My questions pertain to the best way to set that up and what should I ask for in the way of rates and terms. I’ve never done it before so I’m not sure what to expect or what to be sure is included in this type of loan.
So, when we use the term portfolio loan, we simply mean any kind of loan that a local bank would issue to you, on real estate or with real estate as the collateral, in which the paper is not being sold to a quasi-government organization like Fannie Mae or Freddie Mac or the VA. The bank is actually holding that loan in house and servicing that loan with you. They give you the terms and the interest rate.
Justin, you said the officers know you and it’s a local bank, and that’s really important. You can’t walk into a big, chain bank like Wells Fargo to get serious. The people working at those desks most of the time have very limited authority to issue any kind of loan. You’re looking for small, local, family-owned banks that really have the ability to work with you as a real estate investor.
I gave this illustration in an earlier vlog, but it’s appropriate here. I had two students who heard me teaching on real estate come to me. They said, “Where do we go find help to get these portfolio loans you’re talking about?” I told them, “I want you to look outside the metro area. Go right on the outskirts and find all the small towns around there. Go into those small towns and look for small, family-owned banks. They can work with you better when it comes to real estate loans than the big banks.”
When it comes to rates and terms, good collateral is important. Good collateral would be anywhere from 75% loan-to-value or 80% loan-to-value. So say the property you have is worth $100,000, then the entire amount they like to see owed against that house would be $75,000-$80,000. So what if you already own real estate that’s paid down? Say you have a real estate property that’s worth $100,000 and you only owe $30,000, then one of these banks will typically give you some sort of line of credit on that property that would be a total of $75,000-$80,000. This means if you owed $30,000, you now have $40,000 or $50,000 to go put down on another house. We call it stair-stepping your portfolio.
With the term question, they’ll usually do something on these kind of loans with a 3-year loan and at the end of the period you can renew it. The interest rate on this kind of loan is usually around what prime is at their bank. Sometimes it’s prime plus one, sometimes it’s prime minus a half. It’s somewhere in that range. It’s not what mortgage rates are currently, so we’re clear. It’s more around the prime interest rate.
If you’re newer, it may be prime plus two or prime plus three. Then you have to see if you’re still making money. But don’t get hung up on interest rates. Get hung up on cash flow. If me making that loan payment costs me X amount, but I’m making $300-$400 over that, I’m not overly concerned about interest rates. But if you have a good relationship with a bank and have good collateral, then sure, negotiate the rate.
The terms would typically be 3-5 years and they would renew it. Occasionally banks will do a total commercial loan for you. They’ll say if you do 4-5 properties, we’ll give you this loan and put it on a 10-year amortization schedule. That means you have to pay the interest plus the principal in ten years.
He also asks:
I have a $600k paid for house that is my own and 3 rent houses now that have values of $90k, $119K, and $125k. My grosses are $60k, $109k and $115k and the rents are all good at $995, $1295 and $1295. Should I get a line of credit using my personal home from one bank or leave my personal home out of any deal and just do something using the rental properties as collateral? Would you work something with both banks just to have those lines at separate institutions and not limited to one source? Once I get the portfolio loan/s should I continue to pay cash for properties or use the money as down payments to by multiple units?
I like those values for rental houses in your area, first of all. Great question. Here’s what I would do. I would first work with the current rental properties I have. There’s one exception to that. If you have a home that’s paid for, one of the most powerful instruments that you can use for investment property is to get a HELOC (home equity line of credit). HELOC’s you can get in the 3% range or 2.5% if you have really good credit.
Am I going to get lines of credit using my rental properties or my HELOC? Well look at the interest rate, look at how much you have to pay and look at the terms. Then make sure on the backside, 3 or 5 years from now, I’m able with my other rental properties to take out the HELOC, in other words pay off the HELOC, on my primary home. I want to keep my primary home free and clear.
If that primary home is titled in your name, always remember if you get sued in real estate and you’ve got a $600,000 house that’s paid off, that becomes a target for somebody who is suing you. I’ll talk more about that in another vlog.
So I would go to the banks and talk about HELOC on my primary and talk about lines of credit on my other properties.
I hope this helps you Justin! Remember to leave your questions in the comment section and I’ll try to get to them in the video.
Join me every Thursday for tips on investing in real estate. And make sure to leave your questions in the comment section!