Landlords looking to expand their rental property business face the challenges of finding multiple capital sources, undergoing excruciating underwriting requirements, providing personal guarantees, and being subject to logistical servicing headaches.
Rental portfolio loans aim to tackle these challenges by allowing you to cross-collateralize your assets, opening the door to streamlined access to capital. This financing option can eliminate many of the difficulties that come with trying to finance all of your rental properties separately.
Read on as we dive into rental portfolio loans: what they are, their advantages and disadvantages, and how they can help you grow your rental business.
What Are Rental Portfolio Loans?
With a rental portfolio loan, one lender holds multiple properties, combining them under one umbrella with one monthly payment. The portfolio lender originates the loan and has ultimate flexibility on its loan terms and conditions.
They can offer more flexible terms than a conventional or blanket loan, like easier qualification, customized loan terms, optional mortgage insurance, and less-strict property condition requirements. However, since the lender assumes more risk by holding onto the loan, they may take steps to modify that risk by imposing higher interest rates, fees, or penalties.
What Are Some Benefits of Rental Portfolio Loans?
Once you’ve acquired five or more rental properties, it’s time to start thinking about them as a portfolio instead of individual units. You’ll see benefits across the board by aggregating your properties under a single portfolio umbrella, including:
An Easier Loan Origination Process
A rental portfolio loan is asset-based — meaning the cash-flowing attributes of the properties within the portfolio determine the loan amount and terms. In contrast, traditional lenders will focus more on your creditworthiness and limit amounts and terms based on personal credit and finances, regardless of whether the properties are high-yield rentals in a strong market.
With a rental portfolio loan, you’re usually only required to provide property-specific documentation to confirm cash flow, value, and cost basis. There’s no need for capital expenditure reserves, additional documents like bank statements or employment verification, or a cumbersome underwriting process. This can save you valuable time — and headaches — so you can focus on more important things, like growing your rental business.
Looser Property Restrictions and Capital Limitations
While traditional financing may limit the number of assets or capital for a single borrower, this is not the case with rental portfolio loans. There’s usually a much higher cap (or no cap at all) on the number of properties, loans, and the dollar amount that a portfolio lender can lend to a single borrower.
What does this mean for you? You can leverage with rental portfolio lenders at your own pace and exponentially grow your portfolio. As mentioned, portfolio lenders typically don’t place a cap on the number of properties you can purchase, whereas traditional lenders may be reluctant to finance more than five investment properties. In other words, this strategy allows you to take the driver’s seat and grow your portfolio when it’s right for you.
And for an added bonus, some rental portfolio lenders don’t always require the property to be in a minimum condition. This makes rental portfolio loans the best bet for investors who want to finance properties needing substantial renovation.
Higher Leverage and Interest-only Options
When working with a traditional bank or a lender that only underwrites on a singular basis, you’ll often be faced with strict loan-to-value (LTV) restrictions. Rental portfolio lenders typically allow for a higher LTV — sometimes up to 75% — based on the current value of your portfolio.
You may benefit from interest-only options and shorter amortization periods with a rental portfolio loan. Combined with a higher LTV, these can allow you more proceeds with a lower monthly payment. This means more working capital, not to mention more opportunities to grow your business.
Increased Operational Efficiency and Cost Benefits
Because a rental portfolio loan allows you to roll up all of your rental assets under one loan, you have just one monthly payment and one point of contact. Gone is the added stress of processing various invoices for multiple lenders every month. As a landlord, you are busy enough, and your bandwidth is better spent running your business.
With that one monthly payment comes cost savings. With economies of scale across your portfolio, a strong portfolio lending partner has the flexibility to work with you and craft a loan with tangible cost savings when compared to your individual rental properties.
With one point of contact, you get more than a lender — you get a partner. You can build a lasting relationship with your single point of contact/portfolio manager since you don’t have to deal with multiple banker relationships across various loans.
Pro Tip:
A good lending partner for your portfolio loan should do the work to provide you with the most competitive quotes and help streamline your due diligence process.
Are There Any Drawbacks to Rental Portfolio Loans?
There are several benefits of rental portfolio loans. Still, as with any financing option, portfolio loans can come with drawbacks, regardless of which financial lender is responsible for originating and underwriting them. Let’s break them down:
- Portfolio loans can come with higher fees attached. This is because portfolio lenders take on more risk by lending to borrowers who may not qualify for a traditional loan. You’ll need to weigh the potential benefits of a portfolio loan against the higher costs.
- They can come with higher interest rates. As with fees, portfolio lenders often charge higher interest rates than you’d get with traditional financing to offset the additional risk they take on by issuing the loan. Specifically, you can expect to see an interest rate that’s 2-4% higher than current market rates and higher closing costs (3-4% of mortgage).
- Prepayment penalties may apply. Portfolio loans can come with prepayment penalties, which means you’ll incur a fee if you pay off the loan early. This allows the lender to recoup the costs they incur when originating the loan. Make sure to discuss with your lender any prepayment penalties that might be lurking in the fine print.
Finding a Lender
If you’re interested in getting a portfolio loan, the first step is to find a lender. Before deciding on a portfolio lender, contact several to inquire about their interest rates, loan origination fees, and the terms and conditions of their rental portfolio loans.
It’s worth noting that most lenders don’t openly advertise their portfolio loans, and many don’t provide them to just anybody — remember, they’re taking on a more significant risk. They often reserve portfolio loans as a perk for their best customers.
Speak with a qualified property financing professional — ideally, one who specializes in working with real estate investors — who can help you better understand which loan option is right for you. If you’ve already built a relationship with a lender, you can ask them if they offer portfolio loans. As a result of having an existing (or previous) relationship, they may be more open to helping you secure a portfolio loan.
Final Thoughts
Portfolio loans can be an excellent option for real estate investors who may not qualify for a traditional loan. They offer more flexible underwriting and can often provide more favorable loan terms. If you’re growing your rental business, a portfolio loan might be just what you need.
The first step is building a relationship with a lender to help you secure future portfolio loans with even better terms. It’s vital to find a reliable lending partner you can trust to help you navigate your options and secure the funding you need to grow your rental business.
With a wide range of bridge and rental funding options to choose from, Kiavi’s team of experts can create a personalized solution for your investment strategy.
Ready to access reliable, fast, and easy financing? Get started with Kiavi today.
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Kiavi Funding, Inc.
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