How to Refinance my Portfolio of Single-family Homes?

Rather than buying apartment buildings, many real estate investors are focusing on acquiring multiple single-family homes and creating a portfolio. With the rising cost of single-family homes, the decrease in overall home inventory, and the increased requirements to qualify for a first-time homebuyer loan program homeownership has dropped, and more people are renting. Specifically, they’re opting to stay long-term in single-family homes in a semblance of achieving the American dream.

However, as a real estate investor with a portfolio of single-family homes, you may be wondering how to refinance them. This can be a difficult process, but rest assured it is not impossible. In this article, we’ll outline the steps you need to take in order to refinance a portfolio of homes, as well as the benefits and potential risks.

What is a Single-family Home Portfolio?

Before jumping into how you can refinance a portfolio or single-family homes, let’s make sure we’re on the same page as to what they are. A single-family home portfolio is a group of individual properties held by the same person, company, or real estate firm. Creating a portfolio of single-family homes has grown as a popular alternative for individuals who do not want to, or cannot afford, to buy apartment buildings. Instead of buying multiple units on one lot, they create a portfolio of residences by buying each property individually one at a time over time, or purchasing them as a whole from another investor.

Single-family home portfolios typically take two forms. They can be a collection of single-family residents that are located within the same city, county, or state. Or, they can be single-family homes with similar characteristics that are located all across the country. For example, there are many real estate investors that build portfolios of homes across the Southeast part of the U.S. buying what are commonly called “doors” in South Florida, Georgia, and Texas.

Usually, homes within a portfolio that are located within closer proximity to one another are more valuable, as they reduce the overall operating costs required. For example, owning a collection of single-family residences in the same county means an investor can use the same property management company which in turn keeps the cost of repairs and general maintenance low.

What is a Refinance?

When a property owner or real estate investor refinances a property they own, they’re seeking a new loan to replace the current mortgage they have against the property with the goal to either save money over the remaining life of the loan or to cash in on the equity that has accumulated.

In general, there are three types of refinance loans a property owner can apply for. The first is a rate-and-term refinance loan, where an investor can secure a new mortgage on their real estate asset for the same amount as their existing loan to take advantage of lower interest rates. In real estate investing, interest is one of the largest cost drivers, so owners often spring at the opportunity to get a lower one and save money.

For example, an investor with an existing $800,000 mortgage at 5% interest, could refinance the property to get a new, lower interest rate at 3.5%, and save 1.5% of the total loan amount over the next 30 years. Doing a refinance in this scenario saves the property owner tens of thousands of dollars over the course of the loan.

The second category of refinance loans is a cash-out refinance mortgage. A cash-out refinance is when someone borrows more money than they currently owe and receives the difference as a single lump-sum payment that they may spend however they choose. If a property’s value, as a quick example, increases to $500,000 and there’s only an existing mortgage on the property for $300,000 that the owner secured decades ago, then they can pursue a cash-out refinance loan in the amount of $400,000, $300,000 of which would be used automatically to pay off the existing loan, with the remaining $100,000 being sent to the owner to use however they desire. Cash-out refinancing for any real estate asset is an excellent exit strategy to recoup initial investment into the property, as well as maximizing the profit from passive rental income, and using the funds as leverage to buy even more real estate.

The third method to refinance property is through an equity line of credit. Similar to a cash-out refinance, when someone gets an equity line of credit, they secure a loan against their property in an amount higher than their existing mortgage that is used to pay off the previous loan and the remaining balance available for the owner to use at their discretion. The unique difference, however, between a cash-out refinance and an equity line of credit, is with the latter, the property owner does not get the balance of their loan all at once.

For example, if a real estate investor is approved for a $744,000 equity line of credit, on a property where they have an existing loan for $350,000, the owner can opt to draw from their $394,000 equity over time, as opposed to one time. In July, they can draw, or ask for a disbursement, $50,000, and then five months later, withdraw from their equity $100,000, continuing the same pattern up to their loan limit amount.

How to Refinance a Portfolio of Homes?

Fortunately, if you, as a real estate investor, have refinanced any property before, whether it’s a house, apartment building, or a duplex, then you have a good general idea of the process of refinancing a portfolio of single-family homes. This is largely because the process is very similar and includes the following steps:

1.      Prepare the Required Documents. Before refinancing your real estate portfolio, make sure you have all of the required documents, including entity and ownership documents; income and profit statements for each property, usually ranging back at least 2 to 3 years; loan paperwork for the present loans; tax returns or bank statements to confirm cash flow and expenses; and personal financial records for any individuals. Lenders will want to see the documents upfront so that they are able to determine the property’s owner’s affordability as soon as possible.

2.      Complete the Loan Application. The next stage in the loan application process is for a potential borrower to complete an official loan application. In this application, as a borrower, you’ll want to write out all the properties owned in your portfolio, the current mortgage amounts, the current lenders, the profit and loss statements for each property showing the cash flow as well as expenses. Furthermore, as a borrower, you’ll need to declare who all of the owners are for each of the properties owned in the portfolio. This is where, as a real estate investor, the process can get tricky. It is common to own each individual asset in the name of separate entities, and lenders will require you to provide documentation for each of them.

3.      Lock in the Interest Rate. Because most real estate investors are refinancing in order to secure a lower interest rate right now, the next natural step in the process is to lock in an interest rate as quickly as possible. Usually, it takes time for a lender to evaluate a portfolio of single-family properties before making an affirmative lending decision. During this time which can be a few weeks to several months, interest rates can and will fluctuate, and the last thing an investor likes to see is the interest rate jump from 4% when they first applied to a whopping 8% by the time the receive final approval. Therefore, as a real estate investor, you’ll want to lock in your interest rate as soon as possible to avoid costly bumps in interest.  

4.      Get the Properties Appraised. At this stage in the refinance process of a portfolio of single-family homes, the lender will require each individual property to be appraised. A real estate appraisal is a professional estimate of the market value of any real property produced by a qualified, independent, and impartial third party known as an appraiser. The purpose of the appraiser’s work is to thoroughly evaluate a property’s condition, income, and market conditions in order to establish how all of these combine to influence the property’s worth.

5.      Consolidate Ownership. Depending on the size of the portfolio, a lender may require the borrower to consolidate ownership of all the real estate into the name of a single entity. If a real estate investor owns a portfolio of 400 homes all across the U.S. in the name of 400 different entities, it would be entirely too costly, complex, and flat out unnecessary, for that lender to make 400 separate loans for each individual property. Usually, at this stage, an investor can transfer ownership of the assets within the properties into the name of one single entity.

 6.      Complete the Underwriting & Get Approved. In the final stages of getting a portfolio refinanced, a borrower will need to complete any remaining underwriting requirements, providing the lender permission to verify all the information that they provided. Then, once the loan is approved, the real estate investor will sign the documents formalizing the refinance, and completing the process.

Advantages & Disadvantages of Refinancing

There are several benefits to refinancing a single-family home portfolio. The biggest one is the time and cost savings of paying one mortgage as opposed to multiple ones. This is a huge convenience to a real estate investor, especially when they own dozens or even hundreds of properties. By solidifying all the mortgages into one loan, sometimes also referred to as a blanket mortgage, only one mortgage payment is required.

An additional benefit to refinancing a portfolio of homes is you retain the same benefits of having a loan for each individual property, when it comes to getting the property sold. Specifically, let’s say an investor has a portfolio of 12 homes in Rochester, NY they retain the option of selling the individual properties within that portfolio without triggering the entire loan balance from being due.

Lastly, there are no limits to the number of homes within a single-family residence portfolio that can be refinanced. It can be as little as four homes in a portfolio to as many as 4,000 residential units that can be refinanced.

There are, however, disadvantages to refinancing a portfolio of homes. The first is the cost to do the refinancing. Typically, a lender charges an origination fee, appraisal fee, and closing costs. Loans involving a portfolio of homes require a lot more work, which lenders like to offset by charging higher fees. The greater the portfolio, the more you may have to pay to refinance, which can be to a borrower’s disadvantage if the savings are not significant. An additional risk to obtaining a loan for a portfolio of houses is not being able to find someone to do it. There is a much smaller pool of lenders that have both eh ability and experience in extending financing, let alone refinancing of a single-family home rental portfolio. This can translate into longer processing times, increased complexity in loan underwriting requirements, as well as higher fees due to the specialized nature of the ultimate loan product.

What to do Before Refinancing a Portfolio

If you’re planning to refinance your single-family home portfolio there are things that you can do to streamline the process.

The first option a real estate investor can take is proactively forming one business or legal entity, such as a limited liability company, corporation, or limited partnership, and then transferring the title of all the properties into the name of that one company. Or, they have the option of forming one company to buy all the individual entities that own the individual homes within the portfolio. Overall, due to federal lending standards, rarely are lenders willing to provide financing to someone who owns several properties in their own personal name, so owners can save themselves a lot of time by taking this step ahead of refinancing.

Secondly, before refinancing a portfolio, as a real estate investor, you should confirm that there are no clauses within the existing mortgages on the individual properties that would trigger prepayment penalties to ensure they have properly seasoned. For example, it is common for the standard loan on a single-family residence to impose a penalty three times the agreed upon monthly mortgage payment amount if a borrower decides to either sell or refinance a property within the first three to six months that the original mortgage was made. In this case, assuming you just acquired and financed a group of seven homes, and now a month later want to refinance: if the mortgage payment is $1,200 a month for each and the prepayment penalty is 3 times that, then you may be on the hook for paying $25,200 in fees. Since the goal of refinancing is to ultimately make more money, avoiding this scenario from unfolding before even starting the refinance process is critical.

How to Find the Right Lender

Many lenders may claim that they can refinance a single-family home portfolio, but as we briefly mentioned before, that is not always the case. As such, there are certain best practices you’ll want to take in order to choose the right one. When it comes to dealing with any lender, experience matters, so it’s important to ensure that they have a lot of expertise in making loans for your portfolio type. To obtain the greatest rates and terms, you’ll want to make sure the lender you’re considering has real-world experience completing numerous transactions in recent years.

If a non-recourse mortgage is also attainable, you’ll want to pursue one. The portfolio debt will not become your personal liability if the loan goes into default, and the lender can only pursue action against the company that owns the portfolio.

Finally, as you shop for lenders, you’ll want to gravitate to those providers who are transparent on how the releases will be structured under this consolidated loan. If one home in the portfolio is sold, will a full or partial repayment of the loan covering them all be required? If you plan on refinancing the asset portfolio in order to position it for a long term hold, can you get a reduction in costs if you agree to a full repayment requirement? These are all key questions you’ll want to ask as you shop for the right lender.

Refinancing Now Will Pay Off

Undoubtedly refinancing any form of real estate, especially a collection of homes will have its financial payoff. As of the date of this writing, interest rates are at historic lows, translating into the lowest borrowing costs investors have seen in years. Additionally, portfolios of single-family homes have become a ‘hot’ asset among real estate investors large and small. Both of which make it a perfect time to consider making the move. To make sure you find the best lender to get your portfolio of single-family homes approved, give me a call at 9177404325. I work hard to help my client make the best financial decision when it comes to refinancing any of their assets.

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