One of the challenges real estate investors face is growing a rental property portfolio. While good single-family rental (SFR) properties can be relatively easy to find, rental loans may become more difficult each time another investment property is purchased.
SFR portfolio loans can give investors access to capital with flexible loan terms to scale up an existing portfolio or purchase a new portfolio of SFR properties.
- An SFR portfolio loan is an option for financing multiple SFR properties under one mortgage.
- Investors use SFR portfolio loans to finance multiple rental properties, build groups of rental homes from the ground up, and finance the purchase of existing SFR portfolios.
- SFR portfolio loans are generally asset-based, with lenders placing more emphasis on property type and cash flow versus a borrower’s credit score and income.
- SFR portfolio loans include no limit to the number of properties or loan limit, and offer flexible loan terms and conditions.
What is an SFR portfolio loan?
An SFR portfolio loan is designed for investors seeking to finance multiple properties with a single loan, or for borrowers who can’t qualify for a traditional loan. The word “portfolio” signals that the loan is held in an investment portfolio.
Portfolio loans are not sold on the secondary market to entities like Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), Veterans Affairs (VA), or U.S. Department of Agriculture (USDA). Instead, a lender keeps a portfolio loan on its own books or sells the loan to a private investor. Keeping a loan allows a lender to customize underwriting guidelines, instead of having to meet traditional federal guidelines.
Because guidelines vary from lender to lender, a borrower may be able to obtain a portfolio loan for a larger mortgage amount, a higher debt-to-income (DTI) or loan-to-value (LTV) ratio, or with a lower credit score. In exchange for this flexibility, loan fees and interest rates may be higher with a portfolio loan.
How investors use SFR portfolio loans
SFR portfolio loans can be structured to suit every investment strategy, from short-term financing to long-term fixed-rate and adjustable-rate loans. A portfolio loan also may contain a “release clause” that allows a borrower to sell or replace individual properties within the portfolio.
Here are common uses for SFR portfolio loans:
- Fixed-rate permanent financing offers the same interest rate over the life of the loan. Unlike a traditional loan with a term of 15 or 30 years, the maximum term of a portfolio loan may be 10 years or less.
- Adjustable-rate permanent financing, or floating-rate financing, is similar to fixed-rate financing, except that the interest rate periodically adjusts throughout the loan term. An adjustable-rate loan may be advantageous for an investor who is purchasing property to rehab or reposition.
- Bridge financing is a short-term loan option used to provide immediate funds to acquire properties or to quickly make capital improvements until the properties can be stabilized by renting to tenants. A borrower will eventually “take out” the bridge loan and replace it with permanent financing.
- Lines of credit are short-term solutions that provide funds to acquire properties or combine existing properties under the same portfolio before obtaining permanent financing.
- Build-to-rent (BTR) SFRs are a rapidly growing subset of the SFR asset class. Instead of purchasing existing homes, investors develop entire neighborhoods or subdivisions of homes specifically built to rent.
BTR portfolio loans typically provide funds through the construction phase until the project is stabilized by renting to tenants and permanent financing is obtained. BTR portfolio loans generally include a release clause that allows individual homes to be transferred to a portfolio loan with permanent financing as they are rented.
SFR portfolio loan interest rates and fees
SFR portfolio lenders generally require proof that a borrower has the ability to repay the loan, unlike a hard money loan with a low LTV secured by a borrower’s assets.
Portfolio loan interest rates
- Interest rates may vary significantly from one lender to the next.
- Portfolio loan interest rates commonly range from 5% to 9%, or .50% to 5% above market interest rates.
- Interest rates are higher because portfolio loans represent more risk to a lender than traditional loans.
- Factors affecting interest rates include:
- Borrower credit score and income
- Borrower's employment and investing history
- Property type and loan use
- Amount of funds held in a reserve account
- Whether the loan will be held on the lender’s books or sold to a private investor
Portfolio loan fees and closing costs
- Loan fees and closing costs on portfolio loans are generally higher than with traditional financing and may vary based on a borrower’s credentials.
- Unlike traditional financing, loan fees and closing costs with portfolio loans are not “rolled into” the loan amount.
Benefits of SFR portfolio loans
SFR portfolio lenders have a lot of latitude to customize a portfolio loan because they are not limited by federal guidelines. Some of the potential investor benefits of choosing a portfolio loan instead of traditional financing include:
1. Unlimited number of properties
One of the challenges investors with multiple SFRs face is that lenders limit the number of properties that can be financed, even when loans are taken out with different lenders. Portfolio loans generally have no limit to the number of individual properties financed.
2. No loan amount limit
Portfolio lenders typically do not limit the amount of capital provided to a borrower. Having no mortgage limit amount allows an investor to grow a rental property portfolio without worrying about funding drying up.
3. Variety of options
Portfolio loan options may include fixed-rate and adjustable-rate financing for permanent loans, bridge financing for short-term loans, and build-to-rent portfolio loans for developing multiple SFRs from the ground up. A borrower may also be able to obtain a portfolio loan with a high LTV, or interest-only options, depending on the lender and borrower credentials.
4. Asset-based decisions
Portfolio loans are generally asset-based, which means a portfolio lender will primarily consider the characteristics of the assets being financed and the cash flow generated, rather than a borrower’s personal and business credit.
5. Nonrecourse loans
While traditional loans typically require a borrower’s personal guarantee, portfolio loans are usually nonrecourse. Nonrecourse loans help to mitigate borrower risk by separating personal assets from business assets.
6. Consolidation options
A portfolio loan allows a borrower to roll individual SFRs into a single loan with one monthly mortgage payment, or to finance or refinance an existing SFR portfolio. Consolidating multiple rental property loans with a single lender helps an investor to reduce the number of invoices paid each month, focus on maintaining a good working relationship with one lender, and provide more time to focus on growing a rental property business.
Drawbacks of an SFR portfolio loan
While there are advantages to an SFR portfolio loan, it may not be the best choice for all investors with multiple rental properties. Here are some of the drawbacks to SFR portfolio loans:
1. Higher interest rates and fees
Interest rates and fees are higher with portfolio loans compared to traditional financing and can vary based on the borrower’s credentials, use of funds, and the type of property being financed.
2. Benefits may be limited
A lender who wants the option of eventually selling a portfolio loan may be less creative with loan terms and conditions, compared to a portfolio lender who intends to hold the loan on its books.
3. No federal guidelines exist
While portfolio loans allow a lender and borrower to customize loan terms, there are fewer borrower protections because portfolio loans are not underwritten by federal guidelines.
How to find SFR portfolio lenders
Locating a portfolio lender may be challenging because portfolio loans are usually not promoted. Here are tips for finding an SFR portfolio lender:
- If you’re a long-time customer, find out if your bank or mortgage broker may be willing to offer a portfolio loan.
- Ask for referrals from traditional lenders, mortgage brokers, title companies, real estate attorneys, property managers, and investor-friendly real estate agents.
- Network with fellow real estate investors on sites like BiggerPockets or private dedicated forums through Roofstock Academy.
- Consider that portfolio lenders may go by other names, such as direct lenders, private money lenders, or hybrid lenders.
- Speak with multiple portfolio lenders to compare loan eligibility requirements, interest rates and fees, terms and conditions, and customer service.
SFR portfolio loans may be good financing options for investors with multiple rental properties to consider or for investors renovating or repositioning property, building a group of SFR properties, or purchasing an existing portfolio of SFR homes. Because portfolio lenders are not restricted by federal guidelines, loan terms and conditions of portfolio loans can be customized to meet the needs and objectives of a borrower and lender.