How to Choose the Best Rental Portfolio Loans
Many real estate investors see growing a portfolio of single family rentals as the best way to scale their business. Having a group of rental homes allows an investor to earn passive income while gaining equity in their investment.
But most investors who travel down this road soon come to the point where they need rental portfolio loans to continue building their assets. They move beyond what they can purchase with cash, or they want to leverage the equity in their homes to purchase more. So they need to find the best rental portfolio loans for their situation.
If you’re this type of investor, here are the terms you need to know when looking for portfolio loans for rental properties.
Where to Look for Portfolio Loans
The first place most investors look for portfolio loans for rental homes is fixed rate Freddie Mac loans. These loans are like typical home mortgages that most people use for their own residences. These loans come at consumer interest rates (currently at record lows) and with traditional underwriting based on the borrowers’ debt to income ratio.
These loans are a great place to start. In fact, although Lima One does not issue Freddie Mac loans, we recommend that investors start there if they qualify, because they will get better rates and lower down payments. However, the thing to know is that most people can only qualify for 10 or so Freddie Mac loans before they hit the limit. So while these loans offer a strong place to start for those looking to start investing in real estate, they are really only a first step solution.
The reason for this is that these loans are designed for people who use homes as residences (permanent or vacation homes), and not for investors. In addition, Freddie Mac loans have strict underwriting and may not work as a rental loan for buying a condo portfolio or for investors whose income is on a series of 1099s instead of a W-2 (full-time) job. These reasons may push investors to alternate portfolio rental loans even sooner.
When Do I Need a Portfolio Loan?
Once an investor owns a handful of rental properties, they will need to search for a portfolio loan for rentals if they want to continue growing their investment portfolio. This is true whether they are using cash to purchase or if they want to leverage the equity in their portfolio to purchase more rental properties. This means using the equity in one house to pay the down payment for another house when finding loans to purchase a single family rental portfolio. This kind of rental property portfolio loan is sometimes called a cash-out refinance.
Private lenders like Lima One Capital specialize in these kinds of loans for rental property portfolios. They are different than traditional Freddie Mac loans in a few key ways.
1. These loans are based on the property, not the borrower.
While a Freddie Mac loan bases loan rental portfolio loan rates on the borrower’s debt-to-income and other credit factors, the main qualification for a rental portfolio is the cash flow of the rental property, as calculated by the DSCR. At Lima One, we assess the borrower’s credit and establish a line of credit to how much the borrower can access in loans, and then underwrite each property deal separately.
2. These loans are business-purpose loans
This means the borrower will need to form an LLC to get one. Usually, borrowers who have multiple rentals already have LLCs because of the other advantages of that kind of setup.
3. These loans can be cross-collateralized.
Cross-collateralization happens when a borrower can combines the equity in multiple properties when taking out a loan. This gives investors more flexibility in getting financing, while retaining the ability to sell single properties out of the portfolio if necessary. In fact, with Lima One’s Rental30 Premier® program, investors get the best rental portfolio loan rates on portfolios with at least five properties (as long as the total loan amount is $500,000).
4. These loans offer flexible financing terms.
As of August 2021, Lima One offers investors fixed rate, fully amortized 30-year loans on rental properties and portfolios (unlike many other private lenders), as well as 5/1 and 10/1 ARM options on 30-year loans. However, investors can also choose shorter, interest-only loans with balloons if they want to minimize their monthly loan payment and plan to sell their portfolios in the near future. This flexibility allows Lima One to offer the best rental property loan rates anywhere.
5. Many lenders require loan seasoning before refinancing rental properties.
In other words, investors need to hold a property for a certain amount of time. Lima One offers flexible seasoning options to give investors options to move quickly when necessary instead of being held back by a rental property portfolio loan seasoning period.
Building a Successful Rental Property Portfolio
There are other keys to building and managing a rental property portfolio. But knowing the key terms in this article can set you up for success for your next investment. Lima One helps investors with finding the right solution for refinancing rental property on a portfolio loans, and with purchasing new rental properties. View our case studies to learn more about how we’ve helped real estate investors with rental portfolios in Memphis, Tennessee; the Detroit, Michigan suburbs; the Charlotte, North Carolina suburbs; the Orlando, Florida suburbs; and Philadelphia, Pennsylvania.
If you’re looking for a portfolio loan for rentals in Ohio, rental portfolio loans in Mississippi, or in any of the 46 states (plus D.C.) where Lima One does business, click below to start the process or lean more.