FUNDING: LOAN CONSOLIDATION
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Demystifying the Math: The Smart Investor’s Guide to Rental Portfolio Loans CONSOLIDATING YOUR RENTAL PROPERTIES INTO ONE PORTFOLIO LOAN CAN UNLOCK SAVINGS AND SIMPLIFY YOUR INVESTMENT STRATEGY.
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W hen 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 under one loan. This consolidation can offer better terms, including lower interest rates and reduced fees, making them advantageous for scaling up. By understanding how these loans are structured and priced, you’ll know how to make informed decisions. This means analyzing not just the surface numbers but also considering how the loan’s terms (i.e., prepayment penalties, liquidity requirements, underwriting requirements, and other loan covenants) can affect your long-term profitability. Let’s look at rental portfolio loans and break down the math behind them using a real-world example so you 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. He’s considering a rental portfolio loan to consolidate his investments. Here’s a comparison of his options: INDIVIDUAL LOANS Processing Fee: $999 per property Origination Fee: 1.5% or $2,000, whichever is greater PORTFOLIO LOAN (FOR A 10-PROPERTY LOAN) 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. INTEREST RATE SAVINGS Ethan stands to gain 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 him more than $10,000 in five years and $20,000 in 10 years, underscoring the substantial
long-term financial advantages of opting for this type of loan.
DETAILED FINANCIAL BREAKDOWN For both the 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%), based on his individual portfolio, leading to lower monthly payments and significant savings over time. ADDITIONAL CONSIDERATIONS In addition to interest rate reductions that lower monthly payments, there are also cost savings from consolidating escrow/title fees, legal fees, appraisals, due diligence, and more. The portfolio loan streamlines these costs, offering a more predictable and manageable financial plan. Beyond
44 | think realty magazine :: may - june 2024
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