How to Use Small Regional Banks to Finance Your Next Rental House

Our Small Regional Bank Story

Example of the perfect “small regional bank.”

Many of you have asked for a post on how to use “small regional banks” to finance your next potential rental house. So here it is! Fortunately, it’s simple. The Stealthy Rich first on rental house #1 used a large bank to get long-term financing. It was great, and they helped guide us through the process, but we paid for that luxury. We even used a mortgage broker on House #4, but that felt like a colonoscopy with all the documentation and checks for which they constantly nagged us. We felt like criminals during that process. We vowed never to go through that again. We knew in our experience that there had to be a better, faster, cheaper way to accomplish our goals. We were getting so bogged down in saving up for a 20% down payment that it was starting to mess with us. Like we’ve said before, we would find a great rental but not have any money to get it to long-term financing because we didn’t have the 20% down payment, which all of these “big” banks offering conventional loans require. So, we’d have to flip the property to get our short term money back and some profit to help save for the down payment on the next one. That was frustrating but a necessary part of our real-estate investor progression.

After House #25, we decided to try and expand our financing options. Expand our minds if you will. We called over 20 local banks to aim for the smaller ones to see if they had a commercial lending division that would loan to two dudes like us. It was tough sledding. Either their fees/rates were not competitive, or they weren’t eager to loan us money. We were about to give up when my partner got the bright idea to see who our competition was using to fund his properties.  We quickly logged on to our local county public records search website and looked up houses in our “farm” that we knew another prominent investor in our area owned. After examing the deeds of trust online, we could see the banks that were loaning him money and, perhaps even more importantly, the name of the actual banker who did the transaction. Bingo. We quickly found a trend and found that this banker was loaning him a ton of money.

How to find a Small Regional Bank – Pro Tip:

Search your county records website where your other rental properties are located and determine which bankers are loaning to other investors. Then give them a call!

How Much Do We Love Small Regional Banks?

We love them so much. In fact, of our 54 properties, 53 are financed with a small regional bank. Furthermore, 42 of them are funded by the same bank. That relationship is printing money for us, and I’m sure it’s quite good for the bank as well. Each time we close, we ask the banker if we are nearing the end of our leash, and she instructs us to keep going. Amazing.

The reason we love them is that they seem to be easier to work with, simple to contact, have less red tape to muck through, and they move fast.

How to Convince Your Small Regional Bank to Loan You Money

Once you’ve made contact and your new friendly banker wants to figure out if you are a good fit, here’s what you need to do to make sure you get some money! In the simplest terms, you want to be “bankable.” Bankable means that in the eyes of the bank, you are a home run, somebody who is sure to find success and profit. In our experience, our banks love three things:

1. High W2 Income – You most likely have to be W2’ed with a “normal” job for these small bankers to take a chance on you. They love, love W2s. I think it’s because they view that earned income as safe and secure. After all, if these loans go south, you are on the hook personally for their repayment.
2. History Owning Rental Properties – If you ask for money to buy investment properties, the bank will want to make sure you have a successful track record of owning investment properties. This requirement is why you generally cannot start with these small banks on your first deal. For your first deal, we recommend going with a more traditional 30-year mortgage.
3. Growing Net Worth – Every few months, our banks ask for our updated Personal Financial Statement. This document is your financial health check; it tells the bank if you are trending in the right direction. Grab a copy of our very own Net Worth Tracker to help you track your net worth and make it simple to sell yourself to your next bank.

Therefore you are going to need good W2 income, a track record of being a landlord, and your net worth should be trending upwards. If these three things are true for you, you are ready to scout out a small regional bank to help you get to the next step.

What is a Portfolio Loan Anyway?

Growing up, I thought, the only way to finance a house was with a conventional 30/15 year loan. When I learned about Portfolio Loans, I was a little uneasy at first glance as they seem to be a bit unique and have a few drawbacks, but overall the positives far outweigh the negatives, in our opinion. Let’s dive into the action.

Portfolio Loans Pros

• Loans are straightforward to underwrite – Because typically, these small banks are keeping these loans; they can decide how much underwriting they require. In our experience, it’s not much more than the documents we talked about above. Personal Financial Statement, Personal Tax Returns, and current Rental Property history/rent roll. We can usually close these loans in a week or two.
• The closing costs are minimal – These banks walk the loans across the hall, so there isn’t a ton of added costs with the loan itself. For many of our loans, the bank didn’t even require a formal appraisal. Crazy. Most of these loans we can close for under $1500 in bank fees. To contrast that with a conventional loan, our fees were close to $4,000
• The closing process is simple – We can call and schedule with our bank at our convenience, and it’s only a few pages of closing documents we have to sign.
• Bank allows for all kinds of creative cash-out refinance opportunities -This is the magic part. Our favorite bank has no seasoning period and will lend us money based on the appraised value. (An appraisal that only costs 100 bucks.) This jewel right here is what has allowed us to snowball so quickly. Buy a house below market value with cash/short term financing, have the bank finance it at 80% of appraised value. We then walk away with all our money we used to buy it in the first place. (FREE HOUSE!!!)

Portfolio Loans Cons

• Rate is only fixed for 5-7  years – Because the government doesn’t guarantee the loan, no bank will lock a rate for 15 or 30 years. Therefore these banks will typically only lock the interest rate for 5 to 7 years. After that time, the rate will reset for an additional five years at the new rate. Therefore the risk of changing interest rates rests solely on the borrower with these loans. So far, we’ve been ok as rates have continued to stay low.
• Rate is slightly higher than conventional – Usually about a 0.5 point higher. This con doesn’t bother us, as the relationship and ease of getting loans are more valuable to us in the long run.
• We must sign a personal guarantee on each loan – Not a huge deal, but still a little unnerving that I am personally responsible (above and beyond the LLC) for all the repayment of these loans.

If you are looking for better financing, then these banks are probably right up your alley. Go search them out in your community!