Thoughts on portfolio loan…..risky or smart?

Question

Hello BP, I’m currently working on my first portfolio loan and have some questions. Here’s the scenario;

I’m doing a cash out refinance on two properties I currently own and purchasing two new properties all in one portfolio loan. I’m using the equity in the two properties that I own as down payment money for the two new properties. The bank will do 75% LTV for the current properties and requires 20% down on the new properties.

My question/concern is having four properties in one single loan. It makes it very clean cut for paying the mortgage and I’ll be saving on closing costs but is this putting too many eggs in one basket? I have no intentions on ever selling these properties as I’m young and in the building stage but I’m trying to look at this from all angles. If you’ve done this type of loan before what were your concerns?

For context all four properties are duplexes and are around 80-110k in value. They are close in proximity within 15min of each other(upstate NY).

Thanks!

Jay Hinrichs · Answer

Yes without negotiated up front release clause the bank will require all proceeds sometimes they will negotiate after the fact but they dont have to.. the other thing is you default and you lose all 4 props.. Now its not as simple as having 4 loans with the same bank B/C the fine print from the bank loan docs will say your automatically cross collateralized so one default and all defualt.

so safest way is have 4 different lenders..  But then again no one thinks of this until something bad happens LOL

But i am a huge proponent of community banking and I do my best to stay with community banks for all our transactions I just make sure i have clear cut release clauses up front..

Eric Kump · Answer

Hey Alexander, I think you are doing things the smart way! By choosing to do one loan you are cutting down on closing costs which makes sense in my mind. If you went about the other way you would spend thousands more on closing costs, and still be on the hook with another mortgage with a higher rate I assume. I would have done the same thing if I were you.

Ben Leybovich · Answer

The biggest issue with cross-collateral like this is selling one of the assets under the umbrella. What the lenders don't tell you upfront is that should you choose to sell one or two out of the four assets, simply cashing out a portion of the mortgage associated with the properties you are selling may not be enough. The bank will most certainly appraise the remaining properties in the blanket and may deem the value of those to not be sufficient to collateralize the remaining debt and force you to pump more cash into the deal.

Rj Lindemann · Answer

I don't think you're putting too many eggs in one basket. As you said yourself, you are saving a great deal of money on closing costs and consolidating everything into one payment. Had you gotten a separate loan for each house, your eggs wouldn't be in different baskets. Technically speaking the basket is you, so unless the amount of debt makes you nervous I wouldn't worry about it too much. Having four $25,000 loans is the same as having one $100,000 loan, it's just that the $100,000 loan sounds bigger. I like the strategy you're using, keep it up!

Brandon Plombon · Answer

The only "concern" or potential issue is if you were to sell one of the properties and how the bank would look at the required paydown. Let's say you have all 4 properties valued at $100k each for a total loan of $400k. A few years pass and they are all $150k now and you want to sell one for $150k. Would the bank require $100k paydown as that was assigned to each property or would the bank require a full $150k paydown leaving you with essentially no cash out on the sale. I know you said you don't plan on selling anytime soon but something to think about or ask your lender how they would view that. Cheers!

Jay Hinrichs · Answer

YUP we were just discussing this aspect.. Its SOP with my new construction subdivisions we have robust release clause provisions up front.

and I have seen flippers get into massive trouble with lenders not realizing they needed releases up front or that even stand along loans are cross collateralize in the event of a default.  MIss payment on one loan and ALL your loans with that bank or HML can be deemed in default at the discretion of the lender.. Its standard stuff we put in every mortgage or trust deed that no one ever reads LOL.

Jay Hinrichs · Answer

ya these are things that are not discussed up front and you find your self in a tight spot after the fact.

I had one big client in the mid west who was a real mover and shaker and he simply did not know that there was automatic cross collateral or in other words you default on one of the lenders loans they can call them ALL in default.  So when he wanted to shedd on bad property he bought thinking he could jsut walk from that one and keep the rest current the HML called them all in default and default interest etc etc which led to a cascading event and a Big huge bankruptcy for him.

Alexander Williams · Answer

@Jay Hinrichs great advice. I’ll will be sure to clear up the exit plan with the lender. Thanks!

Alexander Williams · Answer

@Rj Lindemann helpful insight!

Alexander Williams · Answer

@Eric Kump thanks!

Thoughts on portfolio loan…..risky or smart?

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