How to get as many rental property mortgages as you want
Some of the most commonly asked questions I get are: "How are you able to keep getting all of these rental property loans, and what is the limit to the number of loans a person can get?"
I have a unique skill of determining the "rules of the game" for any business opportunity or investment strategy before I get started. So when I committed to buying as many rentals as I could, I started asking the experts what the rules were for getting multiple rental property loans, and then I built my life and career around making sure I can fit into the lending guidelines and the overall rules of the game as they relate to investment property loans. Want to know what they are and what I did? Read below:
Lenders like consistent income
Since I am in Real Estate where my income varies each month, I had to figure out a way to keep my income consistent. I also knew that the underwriters had differing ways of calculating 1099 income. I wanted to make sure my income was calculated right by the underwriters, so I worked hard my first two years in real estate in order to earn a high income and justify creating an S Corp. The S Corporation allowed me to pay myself a salary along with having a consistent W-2 income and monthly paychecks. Even though I still needed two years of income, it was much cleaner with the S Corp and paychecks and there were less questions from the underwriters when I was able to provide them with a W-2 and a 1099 for the excess income over and above what I received for salary. I also enjoyed some tax savings.
Obviously anyone that already receives W-2 income and paychecks will not have this problem, though business owners should take note of this and know that there are lots of options.
It's also important to note that part of the loan approval includes the lender adding in the income for the new property, which offsets the mortgage payment. So if a new mortgage payment on a new rental property is $1000 per month and the rental income is $1500, the lender will use 75% of rents, or $1125 to qualify and this new property will be a positive income contributor to the investor which makes it easy to qualify for more.
Lenders like to see that borrowers have experience being landlords
Each lender prefers to see some experience in a borrower being a landlord. The easiest way to get a loan and gain experience for the next property is to owner occupy a duplex or multi family property, which is exactly what I did early on. While you would be required to owner occupy the property for a year, a year goes by fast and you'll be happy you did it.
Already own a home you occupy and you're wanting to buy your first investment property? You're perfectly fine to get a mortgage if you qualify, though the lender will most likely use 75% of the potential rental income for you to qualify for the new payment.
If you're wanting to turn an existing owner occupied home into a rental and buy a new primary home, the rules are a little trickier for non-experienced potential landlords. Often times the lender will want to see 30% equity in the current home in order to use fair market rental rates to offset the current mortgage and qualify for the next property.
Work with a lender that has experience with investment property loans
You'll save yourself time and headache by working with someone who has experience in rental property loans. Like any profession, not all lenders are created equal, and I've seen some major screw ups by smart lenders who did not understand the rules of investment loans.
I recommend that every investor client first have a strategy session and go over their goals with their lender to make sure they can qualify for several rental property loans.
Also, do yourself a favor and steer clear of the bigger banks like Bank of America, Wells Fargo, Chase and definitely do not use credit unions. The big banks have bank employees that have to work inside a box, and it is likely they have very little experience with investment property loans. You may be able to get by with one single family rental property loan, but after that they usually have trouble structuring the next loan and applying rental income to qualify. Credit unions are worse, they are great for personal and auto loans, though terrible for investment property loans.
Pick one lender and stick with them for the long haul
If your goal is to get multiple rental property loans, don't worry about shopping around for rates every time with different lenders. There are very few experienced lenders who specialize in rental property loans, and once you find a good one you'll want to stick with them.
An experienced loan officer will save a file with your information, so that the next time you get a new property under contract all you have to do is update them with your pay stubs and bank statements. They should save your tax returns, lease agreements and all other paperwork.
Create a financial folder to share with your loan officer for new loans
Be prepared to give your lender a lot of information in order to get a rental property loan. At a minimum, they will need:
- All lease agreements for all properties owned
- Two years of tax returns, all schedules along with W-2's, 1099's and K-1's
- Two months of Bank statements
- Retirement Account statements
- Most recent mortgage statements
Find a trusted hard money lender and stick with them
If you are wanting to purchase properties at a discounted rate, either at the foreclosure auction or because the condition of the property prohibits financing, you are going to want to find a trusted hard money lender. This hard money lender will loan on properties that do not qualify for conventional loans, and you'll need to make sure that you can refinance to a conventional loan after the repairs are made. I used this strategy for most of my investment property acquisitions and it worked great.
Also, be prepared to pay a high interest rate and several loan origination points for hard money loans. It's all a write off, and I consider it an opportunity cost. In one year I paid around $14,000 in hard money loan fees, but those were all rolled into the new conventional loans and I bought those two properties zero down. So really that $14,000 was a huge investment that paid off greatly.
Know your DTI ratio and keep it low
DTI stands for Debt-to-income ratio.
Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.
If your debt to income ratio is too high, you will not be able to get additional mortgages, or any mortgages. Most lenders will require a debt to income ratio of 43% or less which includes the new mortgage payment. Keep in mind, the rents for the new investment property will be added to your income to help qualify.
Too high of a DTI is one of the most common reasons why a person cannot buy their first investment or get to buy multiple properties. They often have several high car payments, and even a 15 year mortgage on a primary residence could be cause for too high of a DTI ratio.
There are really easy solutions for maintaining a low DTI ratio:
- Increase income: If you happen to love your job though the job does not pay as much, consider one or several side hustles for additional income. Keep in mind, most lenders may want to see two years of tax returns showing consistent income with these businesses in order to count it for qualifying for a mortgage.
- Get a second job with a regular paycheck: Most lenders may require between 30 days to 6 months of paychecks to count this second job income, though if you want to be able to retire by 30 or 40 and a second job can help you get your debt to income ratio in check I suggest you do it. I did... several times in my younger years.
- You should strive to have little to no consumer debt: This seems obvious and is taught in almost every financial planning book and late night infomercial out there.
Consumer debt is one of the worst things you can do for your financial future. Studies show that the wealthier families are worse when it comes to consumer debt than those living paycheck to paycheck. Wonder why this is? They believe they can earn themselves out of it, yet they rarely ever do.
There were times when my husband and I had made a considerable amount of money in a year, and we were tempted to buy a third car or a boat and were also thinking about a vacation home. When we realized that those materialistic things could cost us millions in lost equity and opportunity to buy more investments we decided otherwise.
So my advice is care less about the brand names, the closets full of clothes and the toys that would rarely get used because you're working weekends to pay for them.
Do not have a lot of consumer debt, but go for all the mortgage debt you can
All debt is bad, right? Not necessarily... mortgage debt that is used to acquire cash flowing investment properties is and should be treated differently by mortgage lenders. While there is a mortgage payment attached to a property that will show up on your credit, this property also produces an income, which often times can cancel out or be used as additional income on your mortgage application. So as you acquire more properties, your DTI will likely not be affected, it may even go down, so long as you are also not acquiring consumer debt or mortgage debt that is not able to be covered by rents.
For the above reasons, I am a huge fan of buying properties that cash flow over and above the monthly expenses.
I also believe that 15 year mortgages are useless. The payments are much higher, and this 15 year mortgage will negatively affect your ability to get additional loans because the payment is so high in comparison to the income that comes in, which ultimately affects your DTI.
If you want a similar result as a 15 year mortgage (assuming people chose them in order to pay their property off faster) why not take the excess cash flow and apply that to the principle reduction payment.
Keep your down payment money in a single bank account to save time
If you have your down payment in multiple bank accounts, you'll need to send a lot of bank statements to your lender. It was suggested to me early on to always leave $75,000 in a bank account by itself ready to be used for the next rental property. In some areas you might only need $20,000 (like my new favorite investing city Indianapolis), but I think you get the point.
Also, keep in mind the down payment funds need to be seasoned in your bank account for at least 2 months, or it needs to be sourced from a qualified event such as the same of another property (and you'll need to provide proof).
While family members cannot gift down payment funds for conventional loans, they can provide gift funds as long as those are seasoned.
For example, lets say your parents are nice enough to give you a $14,000 gift which is the maximum amount that is exempt from tax per the IRS. If you wanted to use that to purchase a property you need to have the funds in your bank for at least 2 months prior to purchase AND the funds have to be treated as a gift with no repayment.
It may be easier to qualify if you buy several properties in one year rather than allowing a lot of time in between
When I first received this advice, I was super confused. How could it be that the underwriters would be easier on me if I bought several properties in a year rather than doing one a year. It finally clicked when I thought about what the tax returns look like when I do a big rehab.
Remember when I said we pretty much only bought the ugly rentals that everyone else had passed up, and that we acquired them using hard money loans financed at 100% LTV? Well this was all great, except that when we filed out tax returns we had a ton of write offs because we just remodeled the place. Again, great for taxes but not so great to a underwriters who has to use tax returns for qualifying.
The underwriter doesn't really know if those expenses are going to show up every year, or if that was a one time thing, so when we went to buy more the next year they were only able to use the tax return income (which was low because it was offset by expenses). Fortunately my DTI was low enough that it didn't matter, though this is something for those who decide to use the BRRR strategy to consider.
On the flip side, lets say you purchased an investment property in need of a rehab in January, and finished it in March. Then in June you bought another, since the underwriter doesn't have a tax return showing the rehab expenses on the January property they will just use the income from the leases and call it good.
Understand the financing side of the BRRR strategy
Now that you have a conventional lender and a hard money lender, you are ready to use the BRRR Strategy. The BRRR Strategy stands for buy-rehab-rent-refinance-repeat. The acquisition side of the buyer usually includes purchasing the property with a hard money loan, then quickly rehabbing and then renting out and refinancing. The reason why this strategy is so great is when done right, you may be able to own this new rental with none of your own capital into the deal.
First things first, you have to make sure you qualify for a conventional loan once the condition is suitable for a conventional loan. If not, you have to sell because no one wants to be stuck with a 12% interest hard money loan.
When the property has been rehabbed and the new tenant has moved in, the lender will call for an appraisal on the property. You will then be crossing you fingers hoping that it appraises for at least 20-25% more than what you are into the property. If you've achieve this, you do not have to bring any money to the table.
This is assuming the hard money lender gave you a zero down loan and added a rehab budget. Not all hard money lenders will do that right away, so you may have to put money down and pay for the rehab out of pocket, and if you want those funds back you'll have to do a cash out refinance, which may have a lender required seasoning period of 6-12 months of ownership.
Have your CPA create a draft version of your tax return and have your loan officer review before you file
The first time I asked my CPA to do this he didn't quite understand what I was talking about, but he did it anyway. I wanted to make sure that I was not taking too many write offs to affect my ability to get rental property loans, and fortunately since my DTI was so low I was fine, but it's still a practice I use today just in case.
If you're married, do not buy properties together
I get that this sounds very controversial, and I've had many couples question me on this. However, if you believe you and your spouse will ever want to have the ability to get 20 loans instead of 10 you will consider this advice. I also advise couples to not get any debt together, because that debt will be counted against each of you for every loan. This includes auto loans, credit cards, and any other loans.
So when my income was higher than my husbands (when he was still working), we put our primary residence mortgage in my name along with our auto loan (we paid on off). Then it freed him up to get more loans, though if he was on both our primary and on the auto loan his DTI may have not been high enough.
When it makes sense, go for portfolio loans or commercial loans
These loans do not count against your conventional loan max, which is currently 10 loans per individual. Conventional loans typically have lower interest rates and require less down, they also offer fixed rates and a 30 year amortization schedule. That's why these first 10 loans spots are very valuable, and to be used wisely. They do require the loan be in an individual's name, not as an LLC or Corporation. As mentioned above, you can get to 20 for a married couple and I suggest you do that if you want to buy many.
There are some circumstances where it might make sense to go for a portfolio or commercial loan. But first, here is the difference:
A portfolio loan is held by a local bank and not sold to Fannie and Freddie like conventional loans are. That means the local bank needs to make sure they are not taking on a risk by loaning you the money, so their terms are often 5 year fixed rates with a 25 year amortization and they require higher debt coverage ratios. If you establish a solid banking relationship with a smaller bank who offers portfolio loans, these will be pretty easy to get. They will also do 1+ unit loans whereas conventional will only go 1-4 and commercial 5+. These loans allow title to be held and acquired in an LLC or Corporation.
A commercial loan is done by a larger bank, and they often have similar terms as a portfolio loan with a 5 year balloon and a 25 year amortization. They will not offer loans on properties under 4 units, and they will allow loans in an LLC or Corporation. Commercial loans also use a debt coverage ratio and for qualifying, the lenders focus more on the income of the property than the guarantor(s).
So when would either of these loans make sense?
If you're raising capital and acquiring properties as part of an entity with investors, or if you've maxed out you 10 individual conventional loans, or if you don't meet the qualifications of a conventional loan (such as length of time with new income or DTI).
Keep your credit score high
This is an obvious one, though understand that if you are applying for a lot of mortgages over the years your score will inherently be affected. It shouldn't be affected that much, though its something to be prepared for.
Read this article for 7 simple ways on how to improve your credit score.
After you get over four loans, be prepared to have more in reserves
Some lenders will require six months of mortgage payments per property in your bank account as you get over four loans. So while I would rather spend my money on acquiring cash flowing rentals, I do save enough to make sure I have sufficient reserves for the lenders.
It is harder for a person with a lot of savings and a lower income (or retirement income) to get a loan than it is for a person with a high income and little savings
This rule seems to throw a lot of people off. Common sense says a person with a lot of money in the bank and sufficient assets is a lower risk borrower than a person with a high income with little in the bank. The lending world disagrees with common sense on this one, and here is an example:
I had a retired couple who wanted to buy a new home. They had a few other properties that were not rentals, though they were completely paid off. This couple had well over a million dollars in the bank, and they wanted to be able to take advantage of the extremely low interest rates so they decided to get a 50% down loan for $250,000.
They were denied by multiple banks, and instead had to buy the property using their cash and get a line of credit after closing. These retirees had worked their entire lives, saved a lot of money for retirement, and had perfect credit. So why would a bank ever deny them?
Their debt to income ratio was too high... Yup. Good old debt to income ratios. When the lenders looked at their income (mostly social security and some investment dividends) on paper they barely made enough to cover the property tax payments on all of their properties. The fact that they had several times the amount they were paying for the new house in the bank, and several more millions in paid off properties made no difference to the lenders.
Anyone who ever wondered why you have to go in debt to get good credit should understand how our economy runs by the above example. Those who pay cash and save their money are somewhat punished. Rather than rant and rave I just say fine and get a few more credit cards to pay off each month so that my credit is stellar and I can go get more rentals.
So if you are in rental property acquisition mode, you'll need to figure out the income side for at least the first few purchases until the rental income starts to show up on your taxes as real income and not just break even from the write offs.
Feel like you have a greater understanding of how to get as many rental property loans as you want? Good... though remember the rules of the game as constantly changing and that it's important to have a trusted team of professionals to guide you through this investing journey.
While I feel pretty savvy about my knowledge on getting loans, keep in mind that different lenders have different guidelines and each individual has their own unique situation. This article is not meant to be used as legal, tax or financial advice, and it is highly suggested that you seek the advice of a qualified CPA, Attorney or Financial Planner regarding your individual situation.