Owning multiple rental properties can be a lucrative way to build wealth over the long term, but, unfortunately, financing rental properties isn’t always as simple as applying and getting approved for a mortgage. If you plan on building a real estate portfolio, it’s important to know what potential financing challenges and hurdles you might face.
Depending on your financial situation and real estate investment goals, there are many ways to finance multiple rental properties.
Whether you’re looking for one or two extra properties to rent or want to build a rental property empire, we’ve put together this guide to walk you through all the considerations of owning multiple rental properties.
What To Expect When Financing Multiple Rental Properties
It can be hard to imagine where to start when you’re growing a rental property portfolio. And financing multiple rental properties comes with its own set of challenges and requirements. But if you’ve got a strong financial profile, including good credit, adequate income and solid cash flow, you’ll have an easier time finding mortgage lenders who will work with you.
Let’s dive into what building a rental property portfolio looks like.
What are the benefits of financing multiple properties?
- Building your income: The main draw of building a rental property portfolio is the potential steady income stream. Predictable rental income every month will give you more reliable returns than you might earn with other types of investments.
- Using rental income to fund more properties: Once you’ve established one or two rental properties, you can use their rental income (or your equity) to fund other rental property purchases.
- Tax benefits: As a landlord with multiple rental properties, you may be able to take advantage of tax breaks and deductions residential homeowners don’t have access to, including:
- Depreciation
- Operating and owner expenses and repair costs
- Property tax deduction
- Capital gains tax deferrals
- FICA federal payroll tax withheld
What are the challenges to financing more than one property at the same time?
The main challenge of financing multiple properties is finding a lender and demonstrating that you’re a creditworthy borrower.
Investment properties are typically considered higher risk by lenders because borrowers are more likely to default on investment mortgages than they are on primary residence mortgages. And, each purchased investment property creates more demand on a borrower’s cash flow. If borrowers run into cash-management issues, it can be easy to miss or fall behind on their mortgage payments.
That’s why lenders generally apply stricter requirements for rental properties. Some banks aren’t willing to lend more than one mortgage at a time to borrowers, or they may limit how many properties they’ll allow borrowers to finance.
Finding lenders for investment properties can take some digging, but they’re out there.
Requirements for Multiple Rental Properties
If only getting a loan for a rental property (or any property, for that matter!) were as simple as telling a lender you need a mortgage loan. Mortgages take work, and mortgages on investment properties take more work.
The intent of investment properties must be to generate rental or other income and the type of housing should be one of the following:
- Condominium
- House
- Single-family unit
- Multiunit rental
Loans for Multiple Investment Properties
Several financing options exist for investment properties, including conventional mortgages and more creative options like blanket mortgages or hard money loans. To finance your investment properties, you’ll typically need to provide the lender with:
- Your credit score
- Recent tax returns
- Proof of income
- Bank statements for personal assets or other accounts
- Financial statements for current rental properties
You can shop around for mortgage lenders, or you may be able to save some time if you use a mortgage broker. Mortgage brokers act as a go-between, matching real estate investors and borrowers to lenders, and can help you find the best financing deal for your needs.
Conventional (aka traditional) mortgages
Conventional mortgages are mortgage loans that follow guidelines set by Fannie Mae and Freddie Mac.
Technically, you can finance up to ten properties with conventional mortgages, but specific lenders may have other restrictions in place around how many homes they’ll let you finance (usually it’s hard to get more than four).[1]
Requirements differ slightly if you’re financing 1 – 6 properties or 7 – 10 properties with conventional mortgages.
In general, financing 2 – 6 properties has the same requirements as financing one property. The requirements include:[1]
- A 670 credit score or higher
- A loan-to-value (LTV) ratio under 80%
- Good cash flow and cash reserves
When you’re financing 7 – 10 properties, a credit score of 720 or higher is recommended. Lenders also typically expect you to have cash reserves to cover at least 6 months’ worth of payments for each mortgage loan.[1])
To offset the higher risk they’re taking, lenders typically charge higher interest rates for investment properties than they would with residential mortgages. The rate you end up with will depend on the lender and your credit and financial situation.
Lenders typically prefer down payments of at least 20% for conventional mortgages. However, for investment property mortgages, especially multiple mortgages, lenders may require higher down payments.
Expressed as a percentage, DTI compares your monthly debt to your monthly pretax income. Lenders usually require a DTI of 36% or less for conventional mortgages.[1]
Home equity loans
An alternative to conventional mortgages is to purchase a rental property using the equity in your primary residence. You can do this with a home equity loan, a home equity line of credit (HELOC) or a cash-out refinance.
When you borrow against your home’s equity, you can generally use up to 80% of the equity to purchase or upgrade an investment property. Here’s how these loans work:
- Home equity loan: You get a second mortgage using the equity in an existing property as security. You get the money in one lump sum and repay it over the loan’s term.
- HELOC: You get a line of credit using your home equity as security. It’s a revolving credit line with a credit limit. You can draw on the line of credit up to your credit limit, borrowing what you need and only paying interest on what you borrow.
- Cash-out refinance: You refinance your mortgage for more than its remaining balance. The new mortgage pays off your old mortgage, and you get to keep the rest of the cash.
Blanket mortgages
Blanket mortgages, which tend to have stricter requirements and higher interest rates and down payments, can be used to finance multiple properties with a single mortgage.
This type of mortgage is popular with rental property investors because they come with a few advantages, including paying for one closing and simplifying the financing process across multiple properties. With one loan, you only keep track of one monthly mortgage payment. A single mortgage can help you stay organized and there’s less chance of missing any payments.
Although blanket mortgages have some great perks, they’re often accompanied by higher interest rates, down payments and closing fees. If you want to sell a property under a blanket mortgage, you’ll need to verify that the mortgage contract includes a partial release clause that allows you to sell one of the properties in the mortgage.
If your cash flow isn’t stable, a blanket mortgage can be a risky option. Each property acts as collateral for the other properties. You could lose all of your properties if you default on your property loan.
Hard money loans
Hard money loans are usually short-term loans. Because of their abbreviated length, their interest rates are relatively high in comparison to other loans. It’s sometimes easier to qualify for hard money loans because in these scenarios lenders are more likely to be concerned about your profitability than your credit score.
While you can theoretically use a hard money loan to purchase a property and then pay it off with another lower interest loan, it might not be the most strategic or cost-effective option. Hard money loans are best suited for flipping properties because you typically pay off the loan quickly and minimize return loss.
Portfolio loans
In some cases, Freddie Mac or Fannie Mae may not be able to accommodate your financing needs, especially if you’re financing more than 10 properties. Lenders can issue portfolio loans and keep the debt in-house rather than sell the loans on the secondary loan market. Because lenders hang on to these loans, the requirements for portfolio loans aren’t as strict as other loans.
Portfolio loans can provide advantages to investors with lower credit scores, high DTI or other credit or debt issues. Approval is sometimes faster, and customer service is likely to be better because the loan is managed in-house. However, the loan’s flexible terms may come with higher interest rates and other fees, and you might face significant penalties for violating the loan’s terms.
Credit scores are based on your credit history and demonstrate your reliability to repay debt. They’re based on factors like total debt, payment history and types of credit.
Pass Go and Collect Properties
Financing multiple rental properties isn’t always straightforward, but it can be done with the right strategy and tools. Whether you’re interested in two rental units or a tower of multiunit rental properties, once you know what you’re doing – and how – you can start building your rental property empire with confidence.
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Fannie Mae. “Selling Guide.” Retrieved March 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B2-Eligibility/Chapter-B2-2-Borrower-Eligibility/1032996271/B2-2-03-Multiple-Financed-Properties-for-the-Same-Borrower-09-01-2021.htm