How To Finance Multiple Rental Properties
How to Finance Multiple Rental Properties in a Cost Effective Way
The most cost-effective way to finance multiple rental properties with one mortgage is with a blanket loan. A blanket loan will allow you to buy multiple properties with one mortgage, allowing you to make one monthly mortgage payment for all the properties. Loans like this are an efficient way to finance multiple properties while saving on closing costs and the paperwork that goes along with multiple mortgages.
How to Finance Multiple Rental Properties with One Mortgage
Of course, even getting a sizeable mortgage for investment properties can be tricky. The housing market has improved since a few years ago but lenders are still wary of giving too much money out in loans. This means you will need to prepare carefully before you apply for a mortgage, and plan ahead.
You will need to:
- Make a significant down payment on the property that you apply for
- Check (and correct, if necessary) your credit rating before you apply
- Choose the Property Carefully
- Choose the right bank
- Choose the right type of finance
Some banks will expect people to have reserves, too. This is particularly true for people with multiple rental properties. The lenders will want to know that you have sufficient reserves in your bank account to pay your expenses – both your personal bills and bills relating to your investments. For multiple mortgages, they will want reserves for each one. If you have one mortgage, that simplifies things slightly.
Portfolio Loans / Blanket Mortgage
Mortgage regulations are getting steadily stricter, most typical banks will not want to finance more than 4 properties although they can finance up to 10. The thing that sets the limits is not the law, but your debt to income ratio. If your debt to income ratio is acceptable you can purchase multiple properties without issue.
The debt to income ratio examines the amount of debt that you have right now and the amount of income that you make. Each bank has its own threshold for what it considers to be acceptable. If you go over that threshold then the bank will deem you to have too much debt to be realistically able to service it and pay back your loans, and they will be reluctant to lend to you.
As long as you are below the debt to income ratio, the bank may be happy to extend a mortgage to include more properties. The question is, how can you stay under the threshold?
One option is to make sure that you do not live in any of the properties that you buy under a mortgage. If a person chooses to use a home that they have under a mortgage as their primary residence then this will limit their buying power. As strange as it sounds, you might want to rent while you’re building your property empire since it could almost double the borrowing power you have.
Another thing that can help is to have stable tenants. When you are applying for a blanket mortgage, as these multi-property mortgages are called, the bank will want to know that you are managing the properties well. This means having long-term tenants that pay their rent on time. Some people use a management company to take the hassle out of finding and dealing with tenants. They will take a portion of the rent, but it can be worthwhile anyway for the stability that they offer.
- In 2009, Fannie Mae increased the maximum financed-property limit from four to ten.
- Most of your local banks won’t offer a 5-to-10 properties mortgage because the process of underwriting the investor’s mortgage application can be very hard work.
- To finance a home via Fannie Mae’s 5-1o Properties program, there are many criteria that must be met, including a minimum credit score of 720, substantial down payment requirements (for purchasing) and equity (for refinancing), no bankruptcies or foreclosures in the past 7 years, and more.
- Commercial Lenders are more lenient on loans like this
Choosing a Bank / Lender
If you are looking to get a blanket mortgage, you should choose the bank carefully. There are some banks out there that offer blanket mortgages. Some of them are national banks, but it may be that working with a commercial lender would be a better choice. This is particularly true if you don’t tick all the boxes. For example, if you aren’t able to make a massive downpayment or if your credit history is good, but not stellar.
Local banks or Commercial Lenders are usually more flexible than national institutions. They also know the market much better and are more likely to look favorably on a loan applicant just because they are aiming to invest locally. Consider consulting a mortgage broker, too. They have a large network of potential lenders to send you to and they may be able to recommend one that you have overlooked.
Once you have a relationship with a lender for your first property, make sure that you make all your payments on time and that you manage the property well. When the time comes to invest in a second property, go to the bank with information about the property and your business plan. Ask them to add that property to the mortgage, and so on.
Credit scoring is important for any loan. Interestingly, your personal credit score tends to be less important for a commercial property than it is for a residential property because the company will look at the money the building is likely to make instead of purely focusing on how you handle your money.
If your score is lower than 740 then you might have to pay a fee (measured in percentage points) to get the same interest rate as someone with a higher credit score. Depending on the fee, it may be a waste of money to buy points. Take a moment to work out the total cost of the loan at different interest rates and with different repayment schedules to work out what would be the best choice in your circumstances.
If your credit rating is borderline, then make sure everything on it is correct. Question anything that looks incorrect. Remove that financial association with an ex or an old flatmate. Query that debt you don’t recognize. If you have defaults, see if you can get them removed if you negotiate with the lender. Or, if they’re close to falling off your credit report wait a while to apply for the mortgage. Sometimes patience can save you thousands of dollars.
Choose the Right Property
If you’re new to investing, a multi-family property could be a good option. This is because multi-family properties tend to be less expensive than a set of separate properties that would house the same number of families. You can get one mortgage, and you can let out the property to several people. Even if it is under-occupied you can usually make back at least enough to pay the mortgage.
When you are ready to buy more properties, you can then start looking at either ‘nicer’ properties, hoping to deal with higher quality tenants, or more multi-family properties in the same area to build up a portfolio of buildings that are easy to manage.
Refinance a Commercial Mortgage
Sometimes you may want to refinance your commercial or rental property loan. Before you do this, seek financial advice. Make sure that you understand the terms that you are refinancing under and what interest rate you will get, or be locking yourself into. A good financial planner will be able to run the numbers and tell you how much the loan will cost to repay normally, and how much it will cost if you start to repay early, as well as how that compares to the mortgage you have now. The difference can easily be tens of thousands of dollars, if not more, over the lifetime of a rental property loan.
There may be some instances where refinancing to secure your interest rate for a certain number of years could be a good option. Refinancing is a gamble, however, and it is not something that you should do lightly. Don’t fall into the trap of chasing the short term cash injection if the cost is going to cripple you over the next decade.
Also, remember that using an umbrella mortgage is a good move for some businesses, but if you become unable to pay the mortgage all of your properties could be at risk. Keeping different properties with different lenders, or even under different limited liability companies, can offer you some protection should things go wrong.
Keep your portfolio at a manageable size
Make sure that you are clear on the level of risk, and that you do not take on more properties than you can afford to manage. Be willing to sell properties that are not working out, and communicate with the bank regularly, especially if something isn’t going as planned with an investment.
Look for a bank or lender that understands the property business and that is willing to invest to help you grow. Those first few properties are the hardest for most people to get, but once you have them it’s possible to expand your rental empire steadily year after year.