Pitfalls of a 12 BRRRR Property portfolio loan in your 1st year

[Joseph England]

I was very successful in doing over 20 rehabs in my first year. For the first 12 rental rehabs I completed, I chose to go the route of refinancing these through a portfolio loan from a local bank. This ended up being harder than I originally expected due to a number of factors, but probably the biggest one was that I had built my business up so quickly and had completed so many properties before I ever filed my business' first tax return. I am writing this post so I can help illuminate other investors of issues I experienced through this whole process. Hopefully everyone can learn from my experience and be better prepared for issues that can arise. I will list below the biggest issues I ran into and how I was able to get around it. 

Getting a local bank to do a 12 property portfolio loan in your first year before you even filed your 1st tax return. 

This was a issue because when I started meeting with local banks about this portfolio loan, almost every bank told me to come back after I had been in business for 2 years (2 tax returns). I was now afraid I had chosen the wrong strategy but refused to stop, and I kept calling and meeting with local banks. Until, one day I found a local Baltimore bank that would work with me despite my lack of business tax returns. They also didn't believe in the 1 year seasoning rule(The property has to be rented for one year) that a number of other lenders hold as policy. The bank I used believed this rule wasn't applicable because once most leases were up after 1 year a number of tenants would be moving out. So it would be pretty common for you to wait the one year only to find yourself looking for anther tenant anyways. The lesson here is that Every bank has its own personality,  investment strategies, and risk mitigation levels. You just have to keep searching till you find a lender who's investment strategies align with yours.

Be prepared for your first portfolio loan to take a while

At this point I had done a single BRRRR property refinance through a bank and it took almost two months. I had an expectation for this portfolio loan to take 3 months. Unfortunately, it took almost 6 months. I will explain some of the issues that delayed our closing but some of them were due to extra steps the bank had to take to mitigate their risk since we were such a new company. Obviously this isn't ideal but be prepared to have enough money in reserve just encase a delay like this was ever to happen. So, you are prepared and still able to close with the appropriate funds if need be.

Appraisals can make or break your investments and appraisers are they key

Real Estate Investment, like many other things forces you to deal with a varying multitude of people and the their "Human Condition", appraisers are no exception to this. My 12 property refinance consisted of two sets of properties from 2 different LLC's I had started that year. One I owned by myself and the other I owned with a partner. During the appraisal process I somehow had angered the appraiser and he ended up appraising all the properties who he knew I was the sole owner of well below the estimated ARVs. All the properties in the other LLC(the LLC I owned with a partner) all appraised at or above the estimated ARVs. This was devastating news at first because the appraisals were so low on other properties that the deal wouldn't have worked. Fortunately I had two properties right next to each other with the exact same rehab done by the exact same contractor at the exact same time. One was in one LLC and the second in the other LLC, and the appraiser appraised the first at $155K (which was the estimated ARV) and the second at $135K. I use this as well as other disparities in the other appraisals and was successful in convincing the bank do redo these appraisals with a different appraiser. It worked! The second appraiser appraised all the properties at or above the estimated ARVs. Moral of this story for me is never take no for an answer. When I first approached the bank about using another appraiser they told me no. I continued to push the issue and gathered evidence to support my case. Fortunately for me the bank eventually listened to reason.

I do not consider myself a subject matter expert nor do I pretend to know all the best ways to solve these problems. But, I have made many mistakes and I want everyone (especially those starting out) to learn from my mistakes and the obstacles I encountered throughout this process. If anyone has a another way to get around some of these issues or has a story of their own, PLEASE SHARE!

[David Fernandez]

Great post @Joseph England!

You touched on this a little with your appraiser story, but another thing that can make your deal more or less profitable and, maybe at some point make or break, is the terms of your loan. 

Most people are excited to hear a "yes" from a bank that they almost overlook the terms or agree to anything the bank says. Most of these terms are negotiable and people should know what they really want from a loan. I focus on small MF buildings (5-50 units) and the standard loan for these assets is something like a 5/20 or 5/25 with 70% LTV at an X% rate.

The rate, although important is not my main decision factor. I don't settle for less than a 7/25. I want a better CF by amortizing the loan over 25 years rather than 20 and the security (and costs) of not having to refinance every 5 years. Also, I work with a bank that does not require any seasoning and they lend based on as-completed value rather than on as-is value, so I can get a lot more than 70% LTV, leaving me with more cash available to do more deals.

[Brian Garrett]

Originally posted by @David Fernandez:

Great post @Joseph England!

You touched on this a little with your appraiser story, but another thing that can make your deal more or less profitable and, maybe at some point make or break, is the terms of your loan. 

Most people are excited to hear a "yes" from a bank that they almost overlook the terms or agree to anything the bank says. Most of these terms are negotiable and people should know what they really want from a loan. I focus on small MF buildings (5-50 units) and the standard loan for these assets is something like a 5/20 or 5/25 with 70% LTV at an X% rate.

The rate, although important is not my main decision factor. I don't settle for less than a 7/25. I want a better CF by amortizing the loan over 25 years rather than 20 and the security (and costs) of not having to refinance every 5 years. Also, I work with a bank that does not require any seasoning and they lend based on as-completed value rather than on as-is value, so I can get a lot more than 70% LTV, leaving me with more cash available to do more deals.

Hey David do you know if your lender is national or only local to you? 

I'm looking for one who uses the ARV or new appraisal with no seasoning period.

[David Fernandez]

@Brian Garrett, I work with a local lender. They have less than 10 branch offices and they keep all their loans in house, so they can be a lot more flexible than other banks.

I called and visited 30+ banks before I started working with them, so I’m sure you can find one in your back yard. Good luck!

[Joseph England]

@David Fernandez Would you care to share the local lender you work with?

For everyone else the local bank that I ended up using was Revere Bank.

[David Fernandez]

@Joseph England, I will PM you. Not sure whether I can post the contact information from the people I work with in the public forums.

[Clarence Bell]

Awesome story! One thing I have seen too for looking for potential lenders was looking at the list of approved lenders in the Maryland Mortgage Program on maryland.gov's website.  A lot of the banks listed are local to Maryland and have more flexibility than the national banks.  Also on some local auction sites for the DMV, they have a list of lenders who have approved lending for properties that require significant work.