Consolidating properties into one portfolio loan can generate savings and simplify your strategy.
When exploring financing options for rental properties, real estate investors often weigh the benefits of individual loans versus portfolio loans.
Rental portfolio loans allow you to streamline all your rental investments into one neat package by combining your properties into one loan. This consolidation can offer better terms, including lower interest rates and reduced fees, making them advantageous for expansion.
By understanding how these loans are structured and priced, you’ll know how to make informed decisions. This means looking not just at the surface numbers, but also considering how the terms of the loan (i.e., prepayment penalties, liquidity requirements, underwriting requirements, and other loan conditions) can affect your long-term profitability.
Let’s look at rental portfolio loans and break down the calculations behind them using a real-world example so you can see the benefits.
Ethan’s scenario: Individual loans vs. Portfolio loan
Consider the following example to understand the math behind rental portfolio loans. Remember, this is an illustration, and your actual terms may vary.
Ethan owns 10 rental properties. You are considering a rental portfolio loan to consolidate your investments. Here’s a comparison of your options:
Individual loans
- Processing fee: $999 per property
- Origination fee: 1.5% or $2,000, whichever is greater
Portfolio loan (for a loan of 10 properties)
- Processing fee: $6,000 (estimated)
- Origination fee: $1,000
By choosing the portfolio loan, Ethan sees a reduction in upfront fees, making it a more cost-effective option.
Savings on interest rates
Ethan will benefit significantly from a portfolio loan due to its lower interest rates compared to single asset DSCR rental financing. Even a modest 0.25% reduction could save you more than $10,000 over five years and $20,000 over 10 years, underscoring the significant long-term financial benefits of opting for this type of loan.
Detailed financial breakdown
For both individual and portfolio loans, Ethan’s loan amount is $1,000,000. However, the portfolio loan offers a lower interest rate (7.25%) than individual loans (7.5%), depending on your individual portfolio, resulting in lower monthly payments and significant savings over time.
Additional considerations
In addition to interest rate reductions that reduce monthly payments, there are also cost savings from consolidating escrow/title fees, legal fees, appraisals, due diligence and more. Portfolio lending streamlines these costs, offering a more predictable and manageable financial plan. Beyond cost savings, Ethan simplifies his rental property business with just one title policy, escrow, one set of loan documents, and monthly payment for his 10 properties.
Looking at the numbers, Ethan realizes that the wallet loan is a no-brainer. Lower fees and significantly reduced interest rates mean more money in your pocket, plus an easier way to manage your expanding portfolio.
