Lenders who make conventional loans are subject to the underwriting requirements of secondary market buyers such as Fannie Mae and Freddie Mac. These requirements dictate loan amount, debt-to-income ratio, minimum credit score, and even the amount of capital that can be loaned to a single borrower.

This lack of underwriting flexibility forced real estate investors to seek multiple funding sources to finance a project or property. Portfolio lenders stepped into the gap to provide mortgages that were otherwise not available.

Most banks will not make mortgage loans for more than four properties[2], although some finance between four and 10. These mortgages usually have high barriers for qualification, including down payments of 25% or more, near-perfect credit scores, and a property in move-in condition. There are usually no options for a cash-out refinance to leverage equity.

A portfolio lender, on the other hand, can create flexible financing solutions for real estate investors. For example, a portfolio lender may make more than 10 mortgages to a single borrower, lend to those with lower credit scores, and even finance distressed properties.

Rental Portfolio Lenders

Rental portfolio lenders specialize in providing a blanket solution for real estate investors managing multiple properties. These loans are usually asset-based, which means credit decisions are based on the asset’s cash flow, not the applicant’s credit metrics.

A rental portfolio loan gives investors access to long-term capital, often at a fixed interest rate. These loans allow borrowers to consolidate their mortgage debt and cross-collateralize their assets to access equity across all properties. This lets investors get around the 75% loan-to-value requirement for most single-asset loans.

Perhaps the most significant feature of many rental portfolio loans is the non-recourse feature. Conventional and hard-money lenders require full recourse loans, meaning the lender can go after the borrower’s personal assets if there is a balance remaining after the sale of collateral. A non-recourse loan lets investors separate their business and personal assets.

There are advantages and disadvantages to every financing option, including a portfolio loan. Here are things to consider before working with a portfolio lender.

Pros of Working with Portfolio Lenders:

• Less restrictive approval process. Because the portfolio lender does not sell the mortgage on the secondary market, conforming loan restrictions do not apply. Portfolio lenders can extend credit to borrowers with lower credit scores or higher debt-to-income ratios and those buying distressed or multi-unit properties.
• More lending flexibility. Portfolio lenders do not limit the number of mortgages extended to a single borrower. They can adjust their loan products and terms to accommodate the unique needs of real estate investors, such as offering consolidation loans to finance multiple rental properties. They may also offer longer amortization periods, interest-only loans, and cash-out refinance options.

Cons of Working with Portfolio Lenders

• Higher fees. Investors can expect to pay higher origination fees with a portfolio lender than with a traditional bank or financial institution[3].
• Higher interest rates. Portfolio lenders make money off the interest rate spread, i.e., the difference between the interest rate charged to borrowers and the interest rate paid on deposits. Most portfolio loans have an interest rate above the market rate for conventional loans.

RELATED: Hard Money 101: Everything You Need to Know About Getting Started With Hard Money Loans

Most real estate investors cultivate a strong network of real estate professionals throughout their careers. The first step in finding a portfolio lender is to reach out to real estate agents and investors for recommendations. Beyond that, it is possible to get referrals from the following sources:

• In some cases, a traditional lender may make a referral to a portfolio lender if they determine that they finance a property.
• Local title companies may provide a list of portfolio lenders used by local real estate investors.
• The local Chamber of Commerce may have leads on the most investor-friendly lenders in the area.
• The internet is also a useful resource for finding a portfolio lender. Many portfolio lenders operate only in the local/state market and do not lend nationally, so it is important to search by state to get the best results.

RELATED: How to Buy 10+ Rental Properties in the Next 5 Years

Conventional lenders have stricter underwriting guidelines and may not be able to finance more than four properties. Portfolio lenders can fill this gap, giving investors another source of capital to scale their business. They can make loans on multiple properties and typically offer other financing solutions, such as cash-out refinances and loans for distressed properties.

1. Bankrate. (n.d.) Secondary mortgage market. Retrieved from https://www.bankrate.com/glossary/s/secondary-mortgage-market/
2. Yates, R. (n.d.) How a portfolio loan can help you buy a home. The Lenders Network. Retrieved from https://thelendersnetwork.com/portfolio-loans/
3. Rapport, M. (2020.) Portfolio Loan Pros and Cons. Millionacres. Retrieved from https://www.fool.com/millionacres/real-estate-financing/portfolio-loans/portfolio-loan-pros-and-cons/