Refinancing a Large Rental Portfolio: Single Property Loans vs. Portfolio Financing Pt. 1

As a real estate investor what are the advantages of a single rental property versus an entire portfolio of rental properties?  In this post we will compare single property loans versus portfolio financing and which strategy may benefit you most as an investor.

In each case, we can do both a purchase and a refinance for these assets in a single property and portfolios. We have two products that can be used to serve both the purchase and refinance of a property. First is the 30-year term 5-1 ARM. When we say, “5-1 ARM,” that means the rate is fixed for five years, and after five years, it floats based on the monthly LIBOR index. We also offer a 30-year fixed loan product, which is simply, a 30-year fixed, fully-amortized loan. That means the rate is fixed at the time of origination and is fully-amortized over that 30-year term.

Now let’s compare our single property loan versus our portfolio loan. So when we look at single property versus a portfolio of properties, we know single means one and portfolio means two or more. For our portfolio loans, we can go up to $2.5 million on a portfolio loan. And on a single property loan, as long as what we call the debt service coverage ratio, meets the minimum requirement of 1.3.

Debt service coverage ratio is that ratio that takes the rental income divided by the PITI. So for simple math, let’s do 1,300 divided by a 1,000. Here you have your rental income. And you divide that by your PITI payment. When we say, “PITI,” we mean Principal Interest Taxes and Insurance. There also may be condo or association fees that apply to the PITI. But as long as this ratio meets the minimum of 1.3 or above, that property will be qualified for our loan.

In a single property loan scenario, each property must appraise for $75,000. That is appraised value. And a portfolio loan we’re going to be at $60,000 for appraised value. In each scenario, the both loan amounts must be at least $50,000. With the loan amounts compared to the appraised value, you cannot have two or more properties in this scenario that hits that $50,000 loan amount. So, in that case, we know that each property inside the portfolio must appraise for $60,000. But here, you can have a single asset that appraises for $75,000 or your purchase price of $75,000 or a little bit less. But as long as that loan amount is at $50,000, we’ll be able to do that deal.

The difference here in both scenarios is the savings on origination. So here, if you have a single property loan and the origination is two percent or $3,500 minimum. This is where it differs. Where that minimum is charged on a single property loan, but if you did it on a portfolio loan, you save money with that two percent. So let’s take an example and look at it. Let’s say, as an investor, I have three houses. Each house, for numbers sake, appraised at $85,000. At Lima One Capital, we only lend up to 75% of loan to value. So not 100%, not 80%, but 75% of loan to value. So, in this case, we’ll take 75% of 85,000.

So when we do 75% of 85,000, you get a loan amount of 63,750. Now remember what I just said. We either do two percent or $3,500, whichever is greater, for that origination fee. So when we go do origination fee of two percent of 63,750, that origination fee will be $1,275. But, in this case, we have a $3,500 minimum origination fee.

Check back in for the second part of our series as we continue to compare the options for refinancing a large rental portfolio!