Financing Multiple Rental Properties: A Beginner’s Guide
Erin Gobler6-minute read
November 24, 2020
Buying multiple rental properties can be a lucrative business opportunity, creating a steady stream of monthly cash flow. And while many investors hope to build their real estate portfolios, financing multiple rental properties can be more of a challenge than financing just one. The good news is that as long as you have a strong financial history and a proven track record of success with your existing rental properties, there are options to help you finance your properties, whether you’re considering just a few or 10-plus.
Benefits Of Financing Multiple Rental Properties
Real estate investing can create a steady stream of cash flow, bringing in more reliable monthly income than other investments. Not to mention, it comes with tax advantages and helps to hedge against inflation.
Once you’ve dipped your toe into real estate by purchasing your first rental property, you might feel ready to dive in head-first by expanding your holdings. Financing multiple rental properties allows you to take advantage of additional income streams without waiting until you’ve paid off the first property.
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.
Loans For Multiple Investment Properties
Just because it’s more difficult to finance multiple properties doesn’t mean it can’t be done. For investors with good credit scores, sizeable down payments, and a proven track record with their existing properties, it’s not at all unrealistic to get multiple loans.
Keep in mind that while many lenders will let you finance more than one property, most will have a limit of some kind. In many cases, investors can get up to four mortgages through traditional means. But other programs and loans can help borrowers to buy 10 or more properties.
There’s not necessarily a limit to the number of traditional mortgages someone can take out. The trick is finding a bank that will give you the number of loans you’d like. In general, someone with good credit and a sizeable down payment could expect to finance up to four properties using traditional methods. And if you get lucky finding the right lender, you may be able to finance more than four. As with a typical mortgage process, you’ll have to meet your individual lender’s requirements for:
- Credit score
- Down payment
- Proof of income
- Debt-to-income ratio
- Cash reserves
When deciding whether to grant you up to four mortgages, lenders will likely want to see that your existing investment properties are performing well. They may not approve additional loans if you’ve had any foreclosures or missed payments on current or past mortgages.
Another thing to consider is that the more loans you borrow, the more of a risk you are for the bank. As a result, you may end up with a higher mortgage rate and more stringent credit and down payment minimums.
A blanket mortgage is a single mortgage that covers more than one property. This type of loan enables investors to purchase multiple investment properties without securing financing for each property separately. Rocket Mortgage® does not offer blanket loans.
Like a traditional mortgage, a blanket mortgage is secured by the properties the investor is using it to buy. Because these loans are intended to finance multiple properties, they can be divided into portions so that each property serves as collateral for a portion of the loan. That way, the investor can sell off a property without paying back each portion of the loan.
These loans are generally meant for investors, flippers, builders and developers. You likely can’t use a blanket loan to purchase an investment property in addition to your primary residence.
Blanket loans can be advantageous, as they may simplify the borrowing process, allowing investors to take out just one loan rather than many. They also allow borrowers to pay a single monthly payment instead of many. That being said, a blanket loan puts all of your properties at risk if you end up not being able to cover the payment. These loans also often come with higher interest rates and fees.
There’s generally no limit to the number of properties you can finance with a blanket mortgage – it all comes down to how much of a loan your lender will approve you for. Many financial institutions choose not to offer these loans, but investors can likely find a commercial bank that offers them. Terms such as minimum credit score, down payment, and cash reserves will depend on your lender.
Freddie Mac’s Investment Property Mortgage Program
Freddie Mac’s investment property mortgage program helps qualified borrowers get the flexible financing they need for their investment properties. According to Freddie Mac’s website, this program is for investors who need customized home financing options for their unique financial situation. To qualify for Freddie Mac’s program, a borrower must meet the following requirements:
- No more than 10 1 – 4-unit properties
- Minimum credit score of 720 for borrowers with more than six financed properties
- 15% down payment for 1-unit properties
- 25% down payment for 2 – 4-unit properties
- Six months’ reserves for each property
- Maximum debt-to-income ratio of 45%
- Gift funds and grants can’t be included
- Must be an eligible fixed-rate, level payment mortgage or a 7/1, 10/1, 7/6-month, or 10/6-month ARM
- Must be a Loan Product Advisor or manually underwritten mortgage
- The borrower can’t be affiliated with or related to the builder, developer or property seller for newly constructed homes
Fannie Mae’s 5 – 10 Properties Program
In 2009, Fannie Mae updated its policies to allow investors to finance up to 10 properties at a time rather than the previous limit of four. The U.S. was in the midst of recovering from the housing crisis, and Fannie Mae felt that highly creditworthy investors were a critical part of that recovery. To be eligible for the Fannie Mae 5 – 10 properties program, you’ll have to meet the following requirements:
- 5 – 10 financed properties
- Minimum credit score of 720
- 25% down payment for 1-unit properties
- 30% down payment for 2 – 4-unit properties
- 6 months’ reserves for each loan
- No delinquencies of 30 days or greater within the past 12 months on any mortgage loan
- No bankruptcies or foreclosure within the past 7 years
- 2 years of federal income tax returns
It’s worth noting that, while Fannie Mae offers financing for 5 – 10 properties, few banks actually offer the program. These loans require more work on the part of the lender, and many banks view investment property borrowers as high risk.
For investors who want to finance more than 10 properties, Freddie Mac and Fannie Mae’s programs aren’t going to be enough. In those situations, a portfolio loan might be the right answer.
A portfolio mortgage is similar to a traditional mortgage in that you take out a loan using your property as collateral. But unlike traditional mortgages, the banks hold the loan in their portfolio for the life of the loan rather than selling it off. And because they aren’t going to be selling the loan, the lender doesn’t have to require that borrowers meet traditional mortgage requirements.
These loans may come with some perks, such as more forgiving credit, down payment and debt-to-income ratio requirements. But they do present a greater level of risk for the lender, so you can expect to pay a higher interest rate and costly fees. And be aware that these loans are likely hard to find. In many cases, banks use them to reward long-term customers that have proven to be trustworthy borrowers.
The Bottom Line
Financing multiple rental properties may seem daunting, and there are certainly more hoops to jump through than with taking out just one mortgage. But with the variety of options available, investors with solid financial histories are likely to find a method that works for them. If you’d like to learn more about financing rental properties, speak with a Home Loan Expert today.
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