Portfolio Lender Terms: Did I Do Well?

Question

I'm in the process of purchasing a duplex for "buy and hold" purposes that will cash flow from the start in one of my local markets.  I'd like to know if what I'm doing with a local bank to finance the purchase is about par for the course with a portfolio lender.

The bank has offered a rent of WSJ Prime +1% that is re-adjusted every six months. 20% down with a 5 year balloon on a 20 year amortization schedule.  No points and no fees.  Do I need to be wary on this deal?

The reason I ask is because after I ran out of conventional loans, I've gone with commercial lenders like Finance of America Commercial or RCN Capital.  Their terms are different: 30 year amortization.  20% down.  Interest rates in the high 5's or low 6's  fixed for 30 years.  They all offered the opportunity to buy down the interest rates.  There are some points required to the lender as well as fees to the broker who connected me to the lender.

The fact that the portfolio loan is a 5 year balloon and the floating interest rate are a bit of a concern, but I guess I could always refinance into a fixed rate product later.

Thanks in advance for weighing in.

Andrea Weule · Answer

That's totally a portfolio loan.  I wouldn't be concerned.  The reason it can adjust is the smaller banks/credit unions do not have the ability to hold a low interest rate if rates go up like the big banks.  Plus, if you got a good deal you should be golden.  The balloon usually doesn't mean you have to refinance, they'll just revisit the rate and terms with you at that point.  Most of my banks have just keep the same loan in place with an agreement to continue.

The bonus with portfolio loan is it won't show up on your personal credit.  You don't have to worry about having too many properties (as you grow, it can look pretty ugly to have more than 4 or worse 10 properties).  They are good with seasoning and they often work with you for future deals once you've built up a relationship.

Looks to me like any commercial/portfolio loan I've ever had.  Frankly, many of mine are prime +2, so only +1 is good.

Best of Success!

Zach Quick · Answer

@Brad Gibson do you want 20 year product? If cash flow is your goal I bet you can get 25 year if you keep searching.

What you got quoted doesn’t seem good/worthy enough to pay a broker for. Keep searching unless you like it.

Adam Wigdorski · Answer

@Brad Gibson

Personally they sound like shit terms

My commercial bank (upstate bank) does this on both cashout refi and acquisition :

5 year interest rate reset based on fhlbny 5 year plus 3%

25/25 term/amortization

80% ltv

Rate - 3.95%

5-4-3-2-1 prepayment penalty - na if you refi with them

Brad Gibson · Answer

Thanks for the response @Zach Quick.  I didn't use a broker for the 5 year balloon with a 20 year amortization.  I'm working with a local independent bank rather than a broker this time.

As to whether I got a good deal from the brokers on the 7 or so loans prior to this one...probably right.  The interest rate in the 5% to 6% range and a couple points.  Not all that great.  That's why I'm trying to go with a local bank/portfolio lender.

Brad Gibson · Answer

@Daniel Dietz Thank you for the input as well Daniel. It would seem that portfolio loans are about as varied as the banks that offer them.

I wonder if it is also regional. Meaning that a horrible deal in upstate NY is a fair or better deal in the oil patch of West Texas.

The fact that there is so little transparency is a disadvantage to the borrower.

Brad Gibson · Answer

@Jonathan R McLaughlin Thank you. The feedback is super helpful. You are right about “working out” anything with a bank. If it isn’t in writing, then it isn’t so.

It is $300 per month cash flow, since there are two doors.

I might complete the deal and shop for a refinance opportunity this time next year and ideally get better terms.

Jonathan R McLaughlin · Answer

@Brad Gibson in the abstract those are lousy to below average terms. Covid has thrown a wrench into stuff but 6 month volatility is scary, 20 year AM while common isn’t the best (you can get some 25) and some portfolios have readjustments at 5 instead of balloons.

But in an environment where the rates are so low and the fed is planning to keep them that way they may work for you.

Comments that “they work out the balloons” are only as true as the banks current appetite for doing so. And at 150/month cash flow you aren’t a slam dunk to refi in a covid era. But it’s probably correct.

It’s not the worst bet if you are confident in the deal, but I would keep looking for better terms. Recent terms as known borrower for small community bank: 4.5% 20% down, 25 year AM and 5 year reset no balloon. .75 loan fee Can’t remember about prepay penalty.

Brad Gibson · Answer

@Adam Wigdorski

Ok, cool. I’m not sure that I’d have access to the same terms. It sounds a little like you give some & get some.

The WSJ prime is 3.25% and I’m +1 on that.  Looks like the rate on mine will float, yours will re-set every five years, but there’s a pre-payment penalty. LTV is same.

Brad Gibson · Answer

Thank you so much for the response @Andrea Weule.  That makes me feel more at ease.  The banker did indicate that when the five year term was up, they'd just renew it assuming I'd met the obligation up to that point.  Good to know that is standard operating procedure.

This is a good deal.  It isn't a home run, but it cash flows $150 per door and provides a COC return of around 15%.  It isn't a home run by any means, but I'll have instant equity, stable tenants, and a cash flowing asset right away.  Some of the properties I thought would be mere singles, turned into home runs.  Slow and steady wins the race over the long haul.

I had another smaller bank offer WSJ Prime +2%, but I passed and kept looking to get this lender.

Finally, you are right about the debt on the personal finance stuff.  It can be jarring to see $1.5 million dollars in personal debt if you don't think about the $3.5 million in assets that secure and pay for the debt.

Portfolio Lender Terms: Did I Do Well?

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