I think @Andrew Postell did a pretty good summary. A couple other points to mention would be that someone could purchase up to 5 investment properties with this loan structure if they qualify, and that this is only available for SFR, not MF properties.
It might help if I shared exactly how I personally used this portfolio loan to advance my investment goals.
This is one of many unique lending options available today that is good for investors to evaluate if it fits their goals.
So here is what I did:
After running the numbers of putting 25% down on one investment property, I chose to purchase 5 similar properties with the same 25% down. These were each new construction homes in the $300K range in growing markets (I'm using general numbers for illustration purposes). So instead of putting 25% down on one $300K new build, I purchased 5 homes with about the same money down (slightly higher due to additional closing costs). This means I purchased $1,500,000 worth of RE with 5% down on each. Two of these homes operate as LTRs where the cash flow is slightly negative or close to break even. Three of the homes I operate as STRs/MTRs where I actually achieve positive cash flow on those still due to the increased income on the STRs/MTRs as opposed to LTRs. Location is key to determine if STR is an option. Overall the portfolio is about break even or slightly positive depending on the month.
Here is the WHY behind how I was able to use this loan to my advantage.
1) I am not too concerned about immediate cash flow as I'm not looking to live off of the cash flow day one. I did not expect much cash flow at all with having a 95% loan on the properties. Being in growing areas, I know that rent will increase each year in addition to growing equity each year through appreciation and loan pay down.
2) Running the math just on appreciation of one home vs five allowed me to grow equity on a portfolio much quicker. For example, at a 4% appreciation rate, if I bought one home, I would have had $12,000 of appreciation after one year. By owning five properties worth $1.5M, on the same 4% appreciation, I would have $60,000 of appreciation after one year. After 10 years this would be a difference of $120K on one home vs $600K on five homes (not counting compound growth). This is a long term investment for me, so I am not concerned with short term, potential market fluctuations as all RE goes up over time. Use whatever appreciation numbers you want, but the concept remains the same. I only illustrated appreciation in this scenario, but the concept of exponential growth is the same by having multiple properties for things like cash flow, debt reduction, and most importantly for me, tax benefits.
3) I run cost segregation studies on all properties I buy to take accelerated depreciation to offset my income. This is most important to me as I earn high income and have a high tax liability. On average, I received a 30% bonus depreciation on my properties being new construction. So, on a $1.5M portfolio, I received a $450,000 tax deduction the year I bought the properties. This equates to over $200K actual tax savings that I would have otherwise paid in taxes. This means that I actually saved more in taxes than I used as a downpayment to buy the portfolio allowing my ROI to be through the roof (over 300% just on tax savings). So, this serves my goal to grow & diversify my portfolio while earning great tax benefits.
4) I am in a strong financial position where I could qualify to buy multiple and have adequate reserves to maintain the properties long term and cover any potential negative cash flow during the time I own them. I could have bought all these properties cash or used other financing options, but this made the most sense to me to expand my portfolio using debt as a tool to meet my goals. I always look for creative financing options to advance my investing goals.
Running the numbers over time is key to understanding what the long term outlook is for this strategy and if it makes sense for each investor.
I hope this sparks some ideas on how unique lending options like this may or may not fit your long term investing goals.
