Financing Your Rental Properties

Real estate investors (REIs) often want to purchase multiple rental properties. If you’re not a large corporation with easy access to Wall Street capital, to get that done you’ll most likely need to finance your rental portfolio with mortgages.

But how many mortgages can one REI have? Is there a limit? How does all this work?

Homeowners generally don’t worry about how many mortgages they have since their maximum is usually two – one for their primary residence, the other for a second home.

REIs, especially in red hot markets (like the one we are in right now), may want to use their cash assets to purchase multiple rental properties. Why? Leverage.

Let’s say you have $120,000 in cash that you want to put to work in rental real estate. You could put all $120,000 into one property that was worth, say, $400,000. The rent minus the mortgage payment might yield you $600 a month or so in gross return.

However, suppose you bought two rental properties and put $60,000 down on each of them. In that case, that same $120,000 investment might yield you $1,000 or more in gross return, plus you would have two properties that could potentially appreciate in value over time.

Conventional lenders generally limit the number of mortgages to four per individual. Since an essential part of an REIs business model is to keep his credit score above 720, having more than four mortgages on a credit report is a bad idea. Why? Showing more than four on your credit report will almost certainly negatively impact your score.

If you want to buy multiple rental properties with leverage (using a mortgage), it’s wise to expand your financing horizons beyond conventional sources.

Portfolio lenders keep their loans in-house. They structure their loans based on their own experience and standards. Who are these folks? Smaller community banks, regional banks, or online lenders such as Visio and Lending Home specialize in working with real estate investors. They do not restrict the number of properties an investor can own. In fact, they tend to reward more experienced investors with lower interest rates and fees. There’s no limit to how many mortgages you can have with portfolio lenders.

Owners are often interested in financing mortgages. Think of it this way – if you own a home and are ready to retire, you will need to reinvest the equity in your home into something that yields a decent rate of return.

Many people are wary of exposing themselves to the stock market right now because share prices are at or near all-time highs. If you go to a bank and open a savings account, your investment yield will be 1% or less. At that rate, you might as well bury it in a coffee can in your backyard.

But suppose an owner finances an investor to buy his home to convert it into a rental property. In that case, he could carry the note at 5% or even more and make a decent return on his money with rock-solid security. The investor does not have to qualify for financing at the bank. The transaction will never be reported to the credit bureaus. This is a potential “win-win” scenario for both parties.

In a similar vein, in every part of the country, private money lenders are in the business of funding real estate transactions. These lenders have their own funds or a pool of investor money to lend to REIs. Rates are very competitive, depending upon the type of transaction.

For example, builders use short-term private money to finance new construction. Fix and flip investors borrow enough money to purchase a distressed property, improve it, and then pocket the difference when selling the home at its new, higher market value.

There are also plenty of private money investors who will fund long-term real estate transactions, like rental property. These notes are not reported to any credit bureau.

Real estate investors need as many options in their financing toolkit as possible to maximize their odds of closing any given deal. Conventional mortgage loans work great for your first rental property or two, but you quickly reach the cap of how many mortgages you can have.

A word of caution. Yes, in 2021, real estate is strong – it’s a “seller’s market” with rising prices and aggressive demand. Interest rates remain near historic lows. Right now, real estate seems to many to be the proverbial “goose that laid the golden egg.”

I am a firm believer in investing in real estate. Over the long haul, I’ll put up the risk-reward ratio of real estate against any other form of investment. That said, always keep in mind that, over months and perhaps a few years, real estate values can fall, and rental demand can decline.

It may seem tempting to go “all in” in real estate today, but if the market takes a hit for any reason (a financial crisis, political instability, government policy changes), being over-leveraged, having too many properties without a lot of equity, could spell disaster.

While opportunities abound, prudence is a virtue. We should take full advantage of current conditions, provided we are always factoring in the short-term risks of market fluctuations.

Sterling Property Solutions’ clients rely on us to handle all aspects of the property management equation. Most of them are busy people, with businesses and careers that require their full attention. They want to be involved and stay informed, but they also know that they do not have the time or expertise necessary to be hands-on landlords.

If you’re seriously considering becoming a landlord in Westchester County, now is a great time to find the right property and get rolling. Our team can answer all of your property management questions and help you address any challenges.

Together, let’s form a plan for you to take full advantage of the current conditions and put in place a robust, long-term program for your success. Please give us a ring at 914-355-3277 or send us an email at [email protected].