How To Finance and Purchase Multiple Rental Properties

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What to Expect When Financing Multiple Rental Properties

With a good personal credit score and income, and an existing rental property portfolio with solid cash flow, investors will find that there are plenty of lenders willing to loan money. However, the terms and conditions may be different from what you’re used to.

Here are some of the things to expect when you apply for more than one rental property loan:

1. More hoops to jump through

Down payment of 20% – 25% or higher
Cash reserve account equal to six months for each mortgage
Debt-to-Income ratio (DTI) below 36% to get the best loan terms
Credit score of +720 to get better rates and terms

2. Higher interest rates

Interest rates are a measure of risk. That’s why a debt instrument like the 10-Year Treasury Note backed by the full faith and credit of the U.S. Government pays an extremely low rate, and why unsecured revolving credit card debt has an interest rate of 20% or more.

Real estate investors financing multiple rental properties should plan on paying a slightly higher interest rate to compensate the lender for additional risk.

While the exact rate will vary based on the lender and the loan terms and conditions, interest rates on rental property normally run between 0.5% and 1.0% more than an owner-occupied loan. So, if the going interest rate for a 30-year fixed rate mortgage on a primary residence is 3.5%, rental property loan interest rates will likely range between 4.0% to 4.5% or more.

No private mortgage insurance payments

Private mortgage insurance – or PMI – protects the lender from borrower payment default. However, the good news is that because you’re putting more than 20% down to finance your rental property, the requirement for PMI goes away.

Not having to pay for PMI also helps to offset the cost of a higher interest rate. That’s because an average PMI fee runs between 0.5% and 1.0% of your total loan amount. On a $100,000 investment property the annual PMI fee could be up to $1,000, adding about $83 per month to your mortgage payment.

Without the extra cost of PMI, cash flow increases and your DTI (debt-to-income) ratio decreases, helping to make it easier to get an additional rental property loan.

3. Rental property must “fit the mold”

According to Quicken Loans, in order to get a loan on an investment property it must be used as a rental or to generate income and meet one of the following characteristics:

Condominium
House
Single-family unit
Multifamily unit

There are still ways for real estate investors interested in fixing-and-flipping or wholesaling to obtain financing for their projects, and we’ll discuss some creative options later in this article. But first, let’s look at multiple loans on rental property from the eyes of a lender.

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4. Tenant Complaints

A tenant may complain about repairs, other tenants, or neighbors. Some of these things may be within the landlord's control, and others may not be. However, not all tenants complain. A problem neighbor or a simple leak can turn into something bigger than it needs to be, so resolving issues quickly is important.

Keeping Track Of Repairs

Since you’re making income from this investment property, you’ll be expected to pay income taxes, but the good news is that rental properties offer some great tax benefits. Whether you’re hiring someone to make a repair, paying interest on the mortgage or simply driving to your property, there’s a wide range of potential deductions.

Words of wisdom: You’ll need to make sure you keep track of these expenses – which means receipts – on the off-chance that the IRS comes knocking. To get the full value of your investment property, you should be making the most of your tax deduction opportunities.

This is another perk of using a management company. They’ll keep track of all of your rental expenses and send them to you in a nice document during tax season. Once again, the amount of time this saves you is worth the money.

Should I Invest in a Condo?

Condos are often cheaper than comparable single-family homes, and they have fewer maintenance requirements. However, it can be more difficult to finance a condo, and you must consider the ongoing association dues and the potential for expensive special assessments. When considering a condo for an investment, be sure to investigate the financial health of the homeowners association and the current condition of the overall building—not just the individual unit.

Financing Options for Multiple Rental Properties

Financing your first couple of rental properties can be relatively easy, but as you grow your real estate portfolio, investment property loans can be harder to find. That doesn’t mean it’s impossible, but it does mean that you need to think outside of the box.

Here are some ways to finance anywhere from one to dozens of rental homes:

4 Properties or Less

Investors with a good credit rating can generally finance up to four rental properties using conventional financing from a traditional bank or credit union that offers:

Loan terms of 30 years
Low interest rate
A down payment requirement of 20% or more of the property value.

5 to 10 Properties

The Freddie Mac Investment Property Mortgages program allows qualified real estate investors to finance up to 10 properties, with the following requirements:

Borrowers with seven or more financed properties must have a minimum credit score of 720
Maximum debt to income ratio of 45%
Maximum of 10 1 – 4 unit properties
Down payments ranging from 15% to 25% depending on the number of properties
Six months of cash reserves required for each property
Borrowers can’t be related to the builder, developers, or seller

10 Properties or More

Blanket loans and portfolio mortgages may be a good options for investors looking for financing for 10 or more rental properties:

Offered by private lenders rather than traditional banks and credit unions.
Blanket loans are a single mortgage used to finance multiple rental properties.
Portfolio mortgages are individual loans to a borrower held by the same lender as a mortgage portfolio.
Loan terms such as down payment, interest rate, amortization, and balloon payment can be customized to meet the needs of the borrower and lender.
Fees and interest rates are generally higher compared to conventional financing.
Lenders may require cross collateralization of other borrower assets (such as a personal residence) in addition to the property being financed.

Options for Creative Financing

In addition to using a conventional loan or a private mortgage, you may be able to use assets you already own to obtain loans on multiple rental properties:

Cash-out refinancing frees up the accrued equity in your current property to use as down payments for additional rentals.
Home equity line of credit (HELOC) lets you tap into the equity in your home when and if you need cash for a new rental property, similar to the way a credit card works.
Self-directed IRA lets you invest in rental property within your retirement account.
401(k) for small business owners provides checkbook control to direct where to invest.

As you research financing options for rental property, be sure to visit the Stessa Mortgage Center to learn more about purchasing or refinancing an investment property.

Agency Loans For Investment Properties

For an investment property, you’ll likely use an agency loan, which means the loan would be backed by Fannie Mae or Freddie Mac. In most cases, you won’t be able to get an FHA or VA loan for an investment property. The exception to this would be if you purchase a multiple-unit property and plan to live in one of the units and rent out the others. If you’re planning to go this route, you should start by talking to a Home Loan Expert.

Is This Really Possible?

Is buying 10+ rentals in 5 years really possible? I definitely think so. It does require work and maybe even some sacrifices to live a more frugal lifestyle, but it’s achievable if you put your mind to it. For example, you can buy a single rental property in the first year, another in the second, then two, three, and finally three more in the last year.

How fast you can grow your portfolio will hinge on two things. First, on your ability to maximize your available cash while minimizing the cash needed for each deal. And second, on securing additional sources of financing.

Your turn—what tips or strategies were the most helpful to you in buying additional properties quickly?

Anton Ivanov is a real estate investor and entrepreneur with a 35-unit rental portfolio spread out across four states. He is the founder of DealCheck—the leading real estate analysis software used by 28,000+ investors and agents to quickly analyze and compare investment properties.

10. Getting Loans

Eventually, you'll have to switch from conventional loans to commercial loans because your debt to income ratio will be so high. That's not necessarily a problem, but it is another thing to consider.

How to get started in real estate

If you choose to invest in real estate, follow these five steps to get started:

Save money: Real estate has some of the most expensive barriers to entry of any of the asset classes. Before you get started, you’ll want to pay off your high-interest debt and have significant savings.
Choose a strategy: Each of the strategies listed above can be successful. If you choose to buy REITs or funds, you can do online research about your options to help you get started. If you want to buy physical property, you’ll need to decide on a market.
Assemble a team: You may want to work with an agent when you get started. Great agents will send you off-book opportunities that haven’t been listed yet. Eventually, you could need someone to manage your properties and an accountant to handle the financials. If you become successful, you may eventually need investors, too.
Do deal analysis: Whether you’re investing in residential or commercial real estate, you should do plenty of research on any investment. For example, with rental properties, you’ll need to analyze what future rent payments could be, what expenses you may be liable for, and forecast what you could sell the property for.
Close the deal: The final step is pulling the trigger. Close on your property, or make the buy in your brokerage account.

Should I Find a Real Estate Investing Partner?

If you would like to invest in a rental property but don't have the money (or expertise) to make it happen, you might want to consider a real estate partnership. In simple terms, an investing partner helps finance the deal in exchange for a share of the profits.

Keep in mind that a partnership isn't an "easy button," and it doesn't get you out of any work. You still have to do your homework, practice your pitch, and be ready to show prospective partners that the investment makes financial sense.

Challenges To Financing Multiple Properties At Once

While there are certainly benefits to financing multiple rental properties at once, you’ll also find there are challenges that come along with it. Lenders may be more cautious about signing off on a mortgage once you’ve already got one loan. Lenders may see you as a greater risk, meaning there are likely to be more requirements. Common hurdles you can expect to run into are:

Banks that aren’t willing to lend more than one mortgage at a time
Higher down payment requirements
Higher cash reserve requirements
A credit score of at least 720
Higher interest rates
A limit on the number of properties you can finance

Expect that once you already have one or more mortgages in your name, you’ll have a harder time finding a bank that will finance additional properties. They’re out there – you may just have to dig a bit deeper.

Financing by borrower type

Solo 401(k)

If you’re a self-employed business owner without full-time employees, you can flesh out your retirement fund with investment properties. Sign up for a Solo 401(k) and then opt for “checkbook control.” This allows you to bypass a plan custodian and serve as your own trustee. You can then use the plan to purchase property, which will be owned by your Solo 401(k).

This option comes with one major limitation: any rental income your properties earn must be deposited back into your 401(k). You must also tap into your 401(k) to cover all rental expenses and repairs.

This plan also allows you to finance property purchases via a non-recourse loan or mortgage, which treats only the home and not the plan as collateral. Solo 401(k) participants can borrow up to $50,000 or 50% of their account value.

1031 exchange

A 1031 exchange allows you to postpone taxes on gains from the sale of an investment property by reinvesting the equity from that property into a new property.

To set up a 1031 exchange, you’ll have to identify a replacement property within 45 days of the sale of your original property. This replacement house will have to be of equal or greater value than the original, and you’ll have to close on the purchase within 180 days.

The properties can’t be for personal use like a second home or primary residence. Here’s an extensive field guide to 1031 exchanges from the National Association of Realtors. And here’s a list of tax deductions for rental property owners.

Self-directed IRA

With a self-directed IRA, you can buy a property through a custodian while tapping the tax benefits of a traditional IRA. Participants can also apply for non-recourse loans.

Traditional mortgage lenders

“Traditionally, the majority of today’s most popular real estate exit strategies have relied heavily on securing short-term financing. In return for higher interest rates than their institutional counterparts, private and hard money lenders have historically offered investors quicker access to capital, less-stringent borrowing requirements, and shorter payback periods. The convergence of these unique offerings has made short-term financing the preferred method of funding for flips and rehabs,” says FortuneBuilders CEO, Than Merrill.

Merrill adds, “It is worth noting, however, that the short-term nature of private money loans doesn’t translate over to the rental property industry well. Due to the lengthy duration of rental property ownership, the higher interest rates associated with private money loans aren’t financially viable for aspiring landlords. Instead, rental property financing usually depends on traditional banking institutions and lenders. Therefore, most investors will seek institutional financing to fund impending rental property purchases. With the average interest rates on 30-year fixed-rate mortgages still hovering below 3.0%, there’s no reason investors shouldn’t be excited to use traditional financing means.”

One of the best ways to finance a rental property has less to do with the loan itself, and more to do with the type of property being acquired. Consequently, prospective landlords will likely have an easier time financing a multifamily home—something with two or three attached units. While the acquisition costs may be higher, lenders view multifamily properties as less of a risk than single-family homes because the threat of vacancy diminishes with each occupied unit. Posing less of a risk to lenders, investors looking to acquire multifamily homes may be in line to receive better rates and terms in the underwriting.

In the event the borrower chooses to live in one of the units, it’s conceivable that they’ll be able to pay off their entire mortgage each month with a single tenant. Every additional tenant, therefore, reduces the risk of delinquency and increases the likelihood of the borrower making timely payments.

“The borrower, on the other hand, may be able to simultaneously pay off their mortgage while creating profits each month in the form of cash flow from tenants. As a result, there’s no reason to believe—at today’s asking rates—a borrower couldn’t pay down their mortgage with other people’s money while building equity in a physical asset and generating cash flow each month,” says Merrill.

Rental Property Financing 101

The second limiting factor in growing your real estate portfolio will always be financing. It’s simple—if you can’t get a loan, you can’t buy the property. You can buy it with cash, but it will slow down your wealth generation.

New investors naturally rely on conventional, 30-y

New investors naturally rely on conventional, 30-year loans to buy rental properties. These are perfectly fine since government-backed mortgages often have the best rates and the longest terms/amortization periods of anything you’ll find elsewhere.

The problem is that due to their rather strict debt-to-income requirements and other regulations, you will, in many cases, max out at around 10 loans. I’ve heard people disagree on the actual number, but I think around 10 is a good guess. After that, the vast majority of banks will simply refuse to give you a new mortgage.

What do you need to start?

I’ve already covered the necessity of educating yourself about real estate investing. That includes taking courses, getting to know other real estate investors, and reading books on the subject. Even more important, is market knowledge. The market is what you are truly investing in, and you’ll need to know it well before you take the plunge. Make sure you can comfortably check the boxes on all the steps before making an offer on your first property.

Once you can, you’ll need the following to go live with rental property investing.

Cash to close

If knowledge is critical to success in investing in rental properties, having sufficient cash is a close second.

Here’s a reality you need to be aware of from the start: you will not be able to purchase investment real estate with 5% down, 3% down, or with the 100% financing offered by the Veterans Administration. Those no- and low-down-payment financing deals are only available to owner-occupants. (The exception will be if you purchase a two-to-four family home, live in one of the units, and rent out the others).

For most investment properties, you should expect to make a down payment equal to at least 20% of the purchase price. This is a typical requirement of traditional mortgage lenders.

That means if you’re purchasing a home for $250,000, you must be prepared to make a down payment of at least $50,000.

Closing costs, escrows, repairs, and cash reserves

There will also be closing costs and escrows for real estate taxes and homeowner’s insurance. Expect that those will add another 4% to 5% of the purchase price to your down payment. The recommended option is to get the seller to pay the closing costs for you, which they may do in exchange for a slightly higher sale price.

I’ve also already mentioned having cash reserves equal to six months of house payments on the property, and this is also typically a requirement of traditional mortgage lenders. But you may also need to factor in additional cash to cover any expected repairs, which will almost certainly be the case if you’re purchasing the property for less than its true market value.

Get a home inspection from a qualified home inspector

The mention of repair costs is the perfect time to discuss the absolute necessity of a home inspection. Even if you know a good bit about investing in real estate, knowledge of the integrity of the physical structure of the property is its own specialization. It’s best to get a set of trained eyes into the property to see what’s lurking in places most buyers don’t look.

For example, you may look at a wall and see what looks to be a minor crack. But a home inspector might see that as a tipoff of bigger problems, like water damage or termites. The same thing can happen with a sagging ceiling. Certified home inspectors are trained to see problems that aren’t obvious. You should have any property you want to purchase thoroughly inspected from top to bottom.

Pay careful attention to the inspector’s report – it can both reveal hidden problems and give you bargaining chips to renegotiate the price to a level that will accommodate the needed repairs.

Or, since you’re buying the house for rental purposes, you can use the report to have the current owner remedy the problem before closing. That will make the house easier to rent once you close.

Line up your financing in advance

Unless you’re in a position to pay the full price of a rental property in cash, you’ll need to obtain financing to make the purchase. Since you’ll need to purchase a rental property for less than its actual market value, you’ll need to be a fully qualified buyer, ready to close in the shortest time frame possible. That means having both your down payment and your financing ready to roll.

Obviously, you can’t get a mortgage before you select a property. But you can get a pre-approval. That involves filling out an application for mortgage financing and securing approval based on your credit and income. Once you have your pre-approval, you’ll be able to make an offer and close quickly.

Your pre-approval should be confirmed by a written letter from the lender. It will not only indicate that you’re fully approved, but also the amount the lender will provide. A pre-approval letter is one of the strongest negotiating tools in any real estate transaction. It reassures an anxious seller that you’re fully qualified to close on the deal.

It’s possible to get a quick pre-approval and closing through online mortgage providers. One prominent example is Reali Loans. They offer an all-online application process, charge no origination fees – saving you between 0.5% and 1% on closing costs – and can close your loan within 30 days.

Applying for a mortgage on an investment property is easy. All you need to do is visit the site, fill out an application, get your pre-approval letter, and then begin shopping for your first rental property.

Tips for Financing Multiple Rental Properties

At first glance, financing multiple rental properties may seem like an impossible dream. But with a little creativity and advanced preparation, it’s easy to make that dream come true.

In closing, here are some of the best tips for getting loans on multiple rental homes:

Make a large down payment to keep overall LTV (loan-to-value) and DTI ratios low and cash flow high.
Aim for a personal credit score of at least 720 to increase your ability to qualify for more than one mortgage and to obtain the most favorable interest rate and loan terms possible.
Be a credible borrower by having personal information and financial performance reports of your current rental property prepared ahead of time.
Develop a presentation on your current investment business for the lender, including investment strategy, past and current property financials, and a biography for each member of your real estate team.
Shop around for a lender the same way you would shop around for an investment property, and offer to bring your lender repeat business and referrals as you continue to grow your rental property portfolio.

How to Finance Multiple Rental Properties to Grow Your Portfolio