In the above subject line there are two assumptions that are generally misconstrued to the average real estate investor. For perspective, I’m an underwriter at a community bank that makes portfolio loans and other types of real estate investment loans.
Here are the wrong assumptions that are told to real estate investors:
- You can’t get a loan at a local bank for a property out of state
- You can’t get a portfolio loan from a traditional bank
Let’s tackle the above statements separately.
You can’t get a loan at a local bank for a property out of state.
I’m sure at some-point somebody was turned down because the property was out of state and if the worst-case happened (which is how us underwriters are paid to think) they would have to drive somewhere else to deal with this property.
However, there is something you can do to not only mitigate this risk but eliminate it.
First, you have to show the local bank that you are a local professional and looking to invest somewhere with higher returns. Bonus tip: talk with smaller community banks and credit unions.
Yes, these institutions may have higher rates but they are also significantly more flexible than larger institutions. I’ve been an underwriter at a Top 10 Bank and a small community bank and this is a fact.
Next, show your local banker your plan for investing out of state. What does a typical deal look like? Pictures and numbers will help your case-study significantly.
Finally, show your banker your plan for managing the property. The management company has to have a very good track-record and offer some kind-of web-based interface for reporting so you have up-to-date financial and operational information for your real estate investment at all times.
Note, I wasn’t paid by MemphisInvest.com (or anybody else) – but know that they offer both of these requirements to their clients. Which makes a bankers job significantly easier and as such means getting loans easier for you.
You can’t get a portfolio loan from a traditional bank
It’s really interesting to hear at my local REIA and other places other investors talk about this mysterious “portfolio loan” product. Real estate investors talk about this product like it’s a holy grail.
In reality, portfolio loans really aren’t that hard to get.
A very important point that real estate investors need to understand is organization is paramount.
Banks need to very clearly see that you have significant equity across a portfolio of properties. The lending institution also needs to see very clearly that existing and projected cash-flow from the properties will easily cover the debt service from the portfolio loan.
Below is an example:
You request a $500,000 portfolio loan.
The bank want’s to charge 5% for this portfolio loan at interest only. The loan renews annually.
Therefore, annual debt service is $25,000 assuming this loan is fully-drawn.
Minimum Debt Service Coverage is 1.25 for most banks.
Therefore, your minimum projected net operating Income (NOI) for this loan should be $31,250.
In summary, don’t let old wise-tails deter you from investing in great property. As Thomas Jefferson said: “action will delineate and define you.”
Jimmy Moncrief is a bank credit officer and real estate investor. He blogs at realestatefinancehq.com. He has a free bank negotiating guide exclusively for memphisinvest.com readers titled: “How To Get Around The 80% LTV” rule. You can access it here: realestatefinancehq.com/memphisinvest