Read and listened but confused on scaling rentals. Help Welcomed

3 Replies

I've read all kinds of material and listened to hundreds of hours of podcasts.  There is one thing about scaling rentals that I just don't understand.  Can anyone elaborate on this?

The question is, how does a bank approve the financing for buying a rental?  

1) Do you need to have verifiable income to cover your personal monthly expenses PLUS the monthly mortgage payments of your rental?  

2) Do you need to have a tenant already lined up to get approved?  Does that make approval easier?

When you're dealing with conventional (personal) mortgages, yes, the bank will look at your debt to income and ensure you have sufficient reserves to pay the mortgage and taxes for approx 6 months on all your assets.

Rental income can be considered, but usually only after 6-12 months depending on the bank.

That's why even though lending rules cap personal mortgages to 10, most people start running into issues at around 4-5 properties.

Once you switch to commercial/portfolio loans, the lender is more interested in the income potential of the properties and less (but not none) on your personal finances. CAP rate, NOI, etc start becoming more important.

Originally posted by @Mike McCarthy :

When you're dealing with conventional (personal) mortgages, yes, the bank will look at your debt to income and ensure you have sufficient reserves to pay the mortgage and taxes for approx 6 months on all your assets.

Rental income can be considered, but usually only after 6-12 months depending on the bank.

That's why even though lending rules cap personal mortgages to 10, most people start running into issues at around 4-5 properties.

Once you switch to commercial/portfolio loans, the lender is more interested in the income potential of the properties and less (but not none) on your personal finances. CAP rate, NOI, etc start becoming more important.

OK this makes much more sense now.   So you would start off by buying your first rental with a personal mortgage, and therefore you need to have income that supports that mortgage as well as your primary residence mortgage.  Then the same for the second home, third home, etc until you no longer qualify.  Then, you can refi all the loans as commercial?  Is that how it works?  Can you elaborate on this last part?  Thank you for the help! @Mike Cumbie

You can always jump right in with commercial loans, but the conventional mortgages have better rates and timeframes, so many people will go that direction at first.

When you decide you no longer want to use conventional mortgages, or the banks won't give you any more, you can either refi them all, or just buy your 5th with a commercial loan.

Most banks will give you a commercial loan based on your experience and track record. It's hard to justify a commercial loan if you are just starting out.

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