Portfolio lender vs. Commercial lender

[Dante Pirouz]

My husband and I have been investing in buy and hold rentals for 3 years now and we currently own 7 units across 3 properties. We have steady income as professors and strong credit ratings. As of this year our tax returns show rental income for the last 2 years and currently we have approximately $200K in equity across all of our properties.

I would like to move away from my traditional residential lender and start a relationship with either a portfolio lender or a commercial lender so that we can pull out some equity from our current properties for a down on a 20 unit in our area which is offered to us with seller financing and to build a long term relationship as our business grows.

Can anyone tell me what the difference might be between a portfolio lender and a commercial lender or are they essentially the same thing?

I plan on making calls one by one to all of the local banks in Northeast Michigan to ask whether they do either one or the other (portfolio vs. commercial lending) and whether they would be interested in working with us but I wanted to find out what the difference is before I do that. Any details on this would be tremendous! Thanks!!

[James Masotti]

@Dante Pirouz - Lots of mixed information here so I'll break down my understanding as well.

As @Bill Gulley and @Jeff Kehl have pointed out a Portfolio Lender will hold their own loans. However this is not necessarily the same as a commercial lender. Many smaller to mid sized banks hold their own loans, regardless of whether they were originated by a residential loan officer or a commercial loan officer. They will have different underwriting conditions and the rates and terms will be different but to a portfolio lender this doesn't matter. Something else to be aware of is that many banks that are not "portfolio lenders" do actually make portfolio loans. So while they will sell of many of the loans the originate the often have special teams or groups that will develop relationships with people where they make loans to keep on their own books. These are often relationship based and if you just called up the bank and asked to speak to their portfolio lending department you would probably hear silence on the other end or be told "We don't do that"

A second point I'd like to clarify. Some portfolio lenders will originate individual loans per property. Others will allow you to do a blanket loan so that you only have one loan and one payment to make. There are pros and cons to both options but just recognize that some people refer to this blanket loan as a portfolio loan because they are loaning on your whole portfolio and not individual properties. As a result of this it's important to ask clarifying questions of your loan officer exactly how they'll handle your accounts. If they are doing a blanket loan, make sure you ask a lot of questions about how they value the assets and add new properties to the blanket loan as well as how to sell of a property from the blanket loan. Lots of these things can trigger conditions within the original loan agreement such as reappraisals (sometimes better for you if values are going up sometimes worse if values are going down), rate resets, or other fees.  Also be aware of prepayment penalties. Since commercial lending is far less regulated than residential things can change very abruptly at a bank/credit union when it comes to their commercial/portfolio lending strategy and you may find yourself searching for a new lender but also in a position where you have prepayment penalties if you refinance out of your current lender. This makes negotiating with a new lender much more difficult or expense depending on whether you can bring your existing portfolio and accounts with you (often a requirement from commercial lenders), or if you'd need to pay to get out of your loans early. 

Point number 3 - If your goal is also to do a cash out refinance then that's relatively straight forward, however if you're looking to get a line of credit across one or more properties that again becomes more complicated. Some lenders do not offer this, others have a limit to the amount they will lend out (i.e. if someone taps their line hard, you might be cut off from yours), As Bill mentioned a line of credit is not always guaranteed to be there. This is something you need to consider. Also in my limited experience of calling around to start inquiring about a business line of credit for my portfolio the due tend to be shorter terms and interest only, this contrasts with a HELOC which has a more traditional and often longer term amortization associated with it.

I had to call around to 30+ banks and credit unions until I found one that was offering what I was looking for. So it's good that you are prepared to do the same up in Michigan. They get a lot of calls from "newbie" investors who don't seem to know what they were talking about. I had much better conversations after spending a lot of time on BiggerPockets researching the options and different types of commercial financing options out there. Many of the loan officers were very appreciative of talking to someone who "knew what they were doing" I only own 4 properties so I wouldn't say I'm that experienced, but I've spent enough time educating myself that I'm not green either. 

Hopefully this will provide you with some additional food for thought and arm you with more questions to ask on BP and of potential lenders