Technically speaking, there’s no limit on the number of mortgages you can have. However, in the real world of real estate investing, financing multiple properties can be much more of a challenge.
In 2009, Fannie Mae increased its maximum conventional financed property limit from four to ten. Unfortunately, most banks still won’t lend if you own more than four properties, including the mortgage on your own home.
Of course, no investor likes to take “No” for an answer. In this article we'll look at how to finance multiple rental properties so that you can keep scaling and growing your investment real estate portfolio.
Financing Your First Few Rental Properties
Most traditional lenders will make loans on up to four properties as long as your:
- Credit score is good
- Loan-to-value (LTV) is in the conservative range of 75% to 80%
- Existing rental properties are performing well
The process for getting more than one loan is similar to what you probably went through when you purchased your own home using a conventional mortgage:
- Long-term, low fixed interest rate
- Low or no mortgage insurance premium required, depending on the size of your down payment
- No up-front insurance premium required
- Proof of income from W-2s or tax returns, statement of assets and liabilities
- Financial statements on any existing investment properties, including P&L, rent roll, and existing loan information
Many investors find that working with a small bank or a mortgage broker is a better way to obtain loans for multiple properties. Loan officers at local banks may be more willing to take the extra time to understand your long-term investment goals, while mortgage brokers often have access to alternative loan financing programs from lenders who are open to negotiation.
Getting a Mortgage on More Than Four Houses
As we mentioned at the beginning of this article, while technically you can finance up to ten properties using conventional financing, in the real world that is almost never the case.
Here are some of the best ways to get mortgages when you have more than four houses.
Fannie Mae 5-10 Properties Program
Under the FNMA 5-10 Financed Properties program traditional lenders make the loan, but then transfer the risk to Fannie Mae. The 5-ten Program differs from conventional loans in several different ways:
- Minimum 25% down payment for a single-family rental property
- Six months of PITI in reserves per property as capital fund if repairs or vacancy rate is higher than expected
- On time mortgage payments on all existing mortgages for the last 12 consecutive months
- No bankruptcies or foreclosures during the last seven years
- Personal tax returns for the past two years, including statements showing the net rental income from all existing investment properties
- Credit score of at least 720 if you are financing between seven and ten homes
Private money mortgage lenders
Private and hard money lenders are individuals and companies who invest in debt by making loans to real estate investors. They generate income from the fees and interest payments from the loans they make.
Because they’re entrepreneurs who understand how investment real estate works, these lenders are much more likely to negotiate compared to a salaried employee working for a big bank.
Every deal is different, but some of the things to expect if you’re looking for a loan from a private or hard money lender include:
- Loan terms are usually fewer than three years in length
- Interest rates are higher than conventional mortgages
- May ask you to cross collateralize your other assets as a payment guarantee
- More interested in property financial performance and market value than your credit history and personal tax returns
- Prefer to work with experienced real estate investors
A blanket loan is used to finance multiple rental properties in one single mortgage. So, instead of having ten individual property loans of $100,000 each, with a blanket loan you would have one loan of $1 million for your combined ten properties.
Blanket loans are a common way of financing commercial real estate such as office buildings and shopping centers, and they are also gaining popularity with residential real estate investors. In part, that’s because a lender making a blanket loan thinks of your ten single-family homes as one small multifamily property.
As with private money loans, the rates and terms of a blanket loan are completely negotiable and will vary from one lender to the next. Just like with private lenders, lenders making blanket loans are more concerned with the performance of your investments and your cash reserves than your credit score.
Portfolio loans are another example of investor-friendly loans for borrowers with more than ten properties.
Unlike conventional mortgages that are sold by the bank originating the loan, portfolio lenders keep their loans in-house. As with private money lenders, companies making portfolio loans make their money from the origination fees and interest income the mortgage generates.
Loan approvals are usually faster, and terms are negotiable. On the other hand, interest rates are usually higher to offset the extra risk the lender is taking. Loan prepayment fees may apply if property is sold or you refinance the loan.
Creative Ways to Finance Multiple Rentals
The longer you work in your real estate investing business the easier it becomes.
You have a system in place to find good properties and analyze deals that make sense. In each market you invest in, you’ve got a real estate team to help keep cash flow strong and your rental property well maintained.
However, perhaps counterintuitively, as you diversify and grow your rental property portfolio, financing often becomes more difficult. That’s because the more real estate an investor holds – even under different LLCs – the greater the perceived risk is, at least in the eyes of a lender.
Rather than take “No” for an answer, the best real estate investors find workarounds to keep growing their business. Here are a few tips for thinking outside of the box to finance multiple rental properties as you scale your portfolio up to ten houses or more:
Self-employed business owners can use a one-participant 401(k)
A one-participant 401(k) - also known as a Solo 401(k), Solo-k, Uni-k, and a One-participant k – is a retirement plan recognized by the IRS that covers a business owner with no employees, or the business owner and his or her spouse.
This type of retirement plan for a self-employed business owner has the same rules and requirements of any other 401(k) plan. But as a business owner, you can make contributions as both an employee and an employer. So essentially, you can “double up” your contributions, up to the specified maximums.
With a one-participant 401(k) you can also choose “checkbook control” for the IRA, meaning that you serve as your own trustee and act as your own custodian. Then, you can purchase rental real estate within your 401(k).
Other options for using an IRA for real estate investing
If you’re not self-employed but currently have an IRA or 401(k), you can also turn your existing retirement savings plans into a self-directed IRA with checkbook control or place your funds with a custodian who specializes in self-directed IRAs.
However, there are a few things to be aware of before using a one-participant 401(k) or an IRA to invest in real estate:
- Income generated from the rental property must stay within the IRA, until you begin normal distributions
- You can’t receive an indirect benefit from the property held within the IRA, such as acting as your own leasing agent or using a property management company you own to manage the real estate
- Tax shelter benefits from depreciation are lost because income within the IRA isn’t taxed
- Real estate held within an IRA is heavily regulated and must follow the rules in order to avoid tax penalties
1031 tax deferred exchange provides extra investment capital
Most real estate investors periodically rebalance their rental property portfolios as they scale up and grow. To avoid paying capital gains tax on the accrued equity, owners use a 1031 tax deferred exchange to relinquish one investment property and buy another, while deferring payment of any capital gains tax owed.
Some owners diversify from one asset class to another, as these two San Francisco Bay area investors did when they sold one large office building and purchased 169 small rental homes through a strategic 1031 exchange. Other investors who own expensive property on the east and west coast often sell when they discover they can literally buy two or three single-family rental houses in secondary markets for the price of owning one in a higher priced market.
There are specific rules and timelines to follow when conducting an IRS Section 1031 tax deferred exchange. However, many investors find an exchange is worth the extra effort, especially when the tax savings can be used to fund multiple property purchases.
When choosing among the different options for financing multiple rental properties, one of the biggest considerations is to decide what is right for you and your long-term investment goals. Factors to think about include:
- What sources of financing help get your deals done cost effectively?
- Timeframe that loans are funded affect how quickly you can get transactions closed.
- Which mortgage options optimize your cash flow and overall performance of your rental property portfolio?