The internet can send conflicting messages on how many one to four family rental properties can be financed into the secondary mortgage market into long-term fixed rate mortgages. The short answer is ten properties can be financed by an individual before the secondary market is no longer an option. These market limits apply to the total number of properties financed, not to the number of mortgages on the property or the number of mortgages sold to Fannie Mae. Please see this link for more detailed information from Fannie Mae.
The flexibility of the secondary market limits after four properties have been financed because cash down payment requirements increase and options for refinancing existing properties are limited. Upon reaching four to ten properties financed, your real estate business is maturing and your cash flow is more dependable. It is a good time to start talking with a portfolio lender.
Flagship Bank Minnesota has extensive experience in lending to Investor Owned Residential Real Estate properties around the Minneapolis and St. Paul Metro Area. These include both 1-4 family rental properties and multifamily (5+ units) rental properties.
Our experience in lending to this market is that borrowers with a dependable income stream from their rentals, and when combined with a stable outside income, are great borrowers. Here are some areas to consider as you continue to grow your real estate portfolio and look to move to a portfolio lender:
- Debt Service Coverage Ratio for your property
A portfolio lender is going to look at the rental rates, vacancy estimates, and expenses to operate the rental property to calculate the cash available for debt service. From this calculation, the bank will want a minimum of 1.20 DSCR. Here is a short form spreadsheet a borrower can use to review its debt service coverage ratio.
- Property Management
A consideration in financing real estate transactions is how the day-to-day activities will be managed. Many borrowers have hired third party managers to lease and manage the activity of their properties while others intend to manage the properties themselves. Depending on size and outside careers, either option is acceptable. The primary requirement is a good grasp on rental rates in the local marketplace, leasing rules, and maintenance/operations expense expectations for the property. Having owned four or more properties, the borrower is expected to have the knowledge to project cash flows and reliably manage and maintain the properties.
- Fixed Rate and Mortgage Expectations
Portfolio lenders do not sell their mortgages onto the secondary market and keep the loan on their books. As a result, the lender is in the position to review your financials and turnaround in a very efficient manner. Certainty in terms and superior, timely service are some of its advantages. It also holds the risk if the loan defaults and the interest rate risk if the rates move higher or lower from the date of the loan so generally the portfolio lender will not offer a long-term fixed rate mortgage for your one to four family rental purchase. Terms can be expected to be 80% loan to value or less with either adjustable rates every three, five, seven, or ten years. The lender will also request the borrower to provide updated financial statements and tax returns for each year the loan is outstanding. This is a significant change from the secondary market lmit but for the astute and organized real estate investor, a seamless activity to be completed when tax returns are completed each year.
- Simplicity in Telling Your Story Once
As a portfolio lender, we get to know your story and plans with the first transaction so every additional transaction we do with your business is simplified. At Flagship Bank Minnesota, we have seasoned lenders and loan committees with stability. The result is more institutional knowledge of your real estate business; and consequently, we have more flexibility and can perform more timely than a new lender starting from scratch.
In all, the key to a successful move to a portfolio lender from the secondary market is organization, knowledge of the market rents/expenses, and timely financial reporting. Flagship Bank Minnesota will work to understand your cash flow, your goals, and is committed to deliver superior, timely service with certainty in terms so that your company can focus on its leasing and real estate operations. You can learn more in our Guide to Investment Real Estate.
We have invested in expert people, systems, and industry knowledge that make us a market leader in a field often dominated by very large banks. If your Minneapolis/St. Paul Metro Area closely-held business, nonprofit organization, or real estate company could benefit from a bank that delivers specifically for you, please give us the opportunity to review your banking needs. We are committed to making our clients successful. Your success is our business!
Flagship Bank Minnesota is a Member FDIC and Equal Housing Lender.