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.

When to Hire a Property Manager

Rental property owners can manage the property themselves or hire a property manager. It can be a hard decision to make because property managers typically charge between 8% and 12% of collected rents, which can really eat into profits.

Still, hiring an experienced property manager can be well worth the cost. After all, it means less work and fewer headaches for you, as you take advantage of their industry expertise. In general, a property manager will:

  • Know how to market the property
  • Understand the local rental market and ensure you price the rental accordingly
  • Show the property to potential tenants (so you don't have to)
  • Screen tenants (for example, conduct credit checks and verify references)
  • Collect rent on your behalf and deposit the money into your bank account
  • Handle late rents and navigate the eviction process
  • Handle tenant complaints
  • Arrange maintenance and repair work
  • Pay property-related bills, such as property taxes, utilities, and insurance

To decide if hiring a property manager makes financial sense for you, ask yourself these questions:

  • Do I have time to manage the property myself? If you have another full-time job, you likely won’t have the time or energy to manage a property on your own. This is especially true if you own multiple properties.
  • How close is the rental property to my home? Being far away from the rental takes more time out of your day and makes it more difficult to manage routine and urgent issues.
  • Am I willing to deal with tenants? Even if you do a good job of screening, it’s likely you’ll have to deal with unreasonable tenants, late rents, and evictions at some point. Is that something you’re willing to do?
  • Is my rental property for short-term or long-term tenants? It might be easier to self-manage if you are looking for long-term renters. But if it’s a short-term rental (for example, an Airbnb), you will be dealing with many different tenants—and potentially a lot of complaints and maintenance issues.
  • Do you need to be in control? If you will have a hard time handing over responsibilities such as choosing tenants and performing maintenance tasks, you may be better off managing the property yourself.

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Are You A Landlord?

When you start buying investment properties, you need to take some time to think seriously about your ability to manage your properties. It’s a tough job being a landlord – tougher than most people think – and I’ve seen many an investor become overwhelmed by the time it takes to be a good landlord.

Fun fact: Be on the lookout out for this kind of investor. They sometimes burn out under the weight of their landlording duties and just sell their whole portfolio at once. It’s usually a good time to swoop in and buy.

But the point is that not everyone is cut out to be a landlord. It’s an intense and time-consuming line of work, especially if you already have a day job. For this reason, I highly recommend getting a management company to do this work for you.

Sure, you’re probably spending 9% to 11% of the rent on this service, but they will take care of the tenants’ needs and collect the rent. And in the unfortunate event that a tenant needs to be evicted, they’ll help handle that process, too. Time is often more important than money, and letting go of this stress gives you the freedom to pursue additional investments.

13. Depreciation

Investing in real estate only really works if you make a profit from selling your property. But when the time comes to sell, you may find yourself making less than you hoped for due to a dip in the market. Additionally, wear and tear can take a significant toll on your asset, which is one reason never to skip maintenance.

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Cash-Out Refinancing

Cash-out refinancing can be an attractive option for raising additional investment capital from property with untapped equity, especially with today’s low interest rates.

Some investors prefer to keep their equity intact, with a low loan balance and solid cash flow. Other rental property owners turn accrued equity into capital with cash-out refinancing, using those funds to purchase additional rental units and scale up the portfolio.

Requirements for investment property cash-out refinancing vary from lender to lender. In general, a lender will allow a mortgage of up to 75% of the property’s value. Note that from the lender’s viewpoint, that’s the same thing as receiving a 25% down payment on the new mortgage.

If you’ve owned existing rental property over the past few years, the odds are you’ve built up a significant amount of equity from rising market values. 

As an example, let’s say you purchased a single-family rental house five years ago with a $100,000 loan amount. Today, thanks to rapidly rising market values, your property has an appraised value of $150,000 and your existing loan balance has been paid down to $80,000.

Your cash-out refinancing would yield: $150,000 current value x 75% new mortgage = $112,500 – $80,000 existing loan balance payoff = $32,500 in available capital for additional real estate investments.

Calculate Your Margins

Wall Street firms that buy distressed properties aim for returns of 5% to 7% because, among other expenses, they need to pay staff. Individuals should set a goal of a 10% return. Estimate maintenance costs at 1% of the property value annually. Other costs include homeowners insurance, possible homeowners association fees, property taxes, monthly expenses such as pest control, and landscaping, along with regular maintenance expenses for repairs.

5. Time Management

It takes a significant amount of time to manage several properties or flip houses. Unless you love flipping houses or being a property manager, remember that your goal is generating a passive income. That means hiring a property manager is worth the 6 to 12% of collected rent (depending on location and services) because they're your best bet to keeping your involvement to a minimum. 

Property managers take care of everything from tenant selection and rent collection to repairs and maintenance. 

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.

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.

Using an LLC for Group Investing

Instead of owning and financing multiple properties on their own, some investors form a limited liability company (LLC) for group investing. An LLC may have multiple members or investors, one of whom oversees the day to day operations of the investment (often with a property manager). 

Depending on how the operating agreement is written, profits and losses from an LLC can pass through to each member on a pro rata share based on the amount of money invested, or can vary depending on how active or passive each member is. For example, the active member may receive a larger share of the profits as compensation for spending more time finding the deal and managing the investment.

By contributing capital to an LLC, investors may be able to purchase more rental property as a group than they could individually.

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.

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