Why You Shouldn’t Worry About How Many Loans You Have in Real Estate

by | BiggerPockets.com

When it comes to RE investing, if you’ve been listening to the BP podcast, roaming the forums, or reading the blog, you’ve no doubt heard many people asking the question: “How many loans can I have?” For those embarking on a new journey (which RE investing usually is), it is completely natural to want to understand every step you’ll be taking along the way. Most of us find comfort in predictability, so when we are scared, it’s only natural to try to understand every single step of the mountain in front of us we have to climb.

The Problem is, Success Doesn’t Work That Way

In fact, no journey really works that way. It’s nice to think of success as a straight line without any hitches, ditches, or bumps in the road. But that’s just not accurate. The road to success is a never-ending path of mistakes, inefficiencies, and unexpected changes in direction. My advice to you, if you want to start making some serious progress in your business, is to get OK with the fact that progress is messy, unclear, and often times involves a healthy amount of uncertainty.

What I’ve found over the last two years of learning a brand new trade (real estate sales as opposed to law enforcement) is that progress often comes in ways and from directions I did not expect it. I very rarely ever know what my path will look like, or what my next step will be — until I’ve taken the one right in front of me.

Brandon Turner and I were talking about this the other day. We have both found success is like a staircase you have to walk, but it’s in the dark. And the only step you can see is the one right in front of you. It’s not until you take that step that the next step is illuminated. For those willing to operate in this level of uncertainty, you will find success. Just like you will find an increase in your elevation if you keep walking up stairs. The path of success isn’t a problem if you’re OK not having the whole road map before you start the journey. It’s only a problem for those who like to know exactly what they are getting into before they get started.

Let’s Take a Step Back and Think About This

When we look at different professions, very few of them pay well if the average day’s work is predictable. Certain jobs offer very little variety, stress, or need to think and adjust on the fly: a worker at Amazon who fills orders, an assembly line worker who does the same thing everyday, an office admin assistant who follows the same procedures all the time. These are positions that offer a high level of certainty but typically very little pay.

Related: What Newbies Should Know About Financing Investment Properties 

Now let’s consider positions that pay very well. They oftentimes also come with a very low level of certainty. A professional athlete who doesn’t know which pitch is coming next, or even what team he’ll play for next year, or if he’ll be out on injury. Or a company CEO who is responsible for making huge adjustments on sometimes short notice. What worked yesterday isn’t guaranteed to work today. A CEO needs to be able to constantly analyze data, interpret it accurately, and make prudent decisions and changes based on that data. This type of work is inherently more stressful, but also tends to pay much much better.

What’s My Point Here?

I’m trying to help you see that for those who can overcome their fear of the unknown, those who can embrace living in a world with less certainty, there are oftentimes big rewards waiting for them! We all want security and protection, but do we think about the price we are paying? Or what we are giving up to have that? Those who are willing to operate without knowing every step of the journey are those who will reap the biggest rewards.

Now to Tie This Back Into Real Estate Investing

Here’s the thing, a huge proportion of potential real estate investors never get started because they want to know every step of the journey when that is impossible to know. If that didn’t strike a chord with you, please read it again. If you are frustrated with your lack of progress, I want to bring attention to the fact that maybe it’s not about you needing to do more, and it is about you needing to let go of the need to know everything.

When folks are trying to start something new, there are a myriad of resources available that offer advice for how to be successful. The majority offer the same wisdom repackaged in different forms.

  • Accountability! Find people to hold your feet to the fire.
  • Grit! Push through it! Don’t stop no matter what.
  • Vision boards! Surround yourself with your goals and motivate yourself to keep moving.
  • Mentors! Find a bunch of people who have done what you’ve done, and stalk them until they are guilted into teaching you what they know!

This type of wisdom does come from a good place, and can be useful in certain situations. I’m just not convinced it’s a one-size-fits-all solution like it’s being offered as. I think a lot of people are willing to do whatever it takes, to constantly envision what they want. They are fine with accountability and they know they need a mentor. What they don’t want to face are the insecurities, fears, and negative emotions that come with starting a journey when they don’t know every step.

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Here is Why They Are Always Frustrated

These people reach out to the “experts” to say, “Tell me exactly what you did so I can copy you!” What they are really looking for is the feeling of knowing what to expect. The frustration stems from the fact that experts just aren’t able to provide that, because it hasn’t worked that way for them. They didn’t know any of the steps after the first one, and they can’t detail for you all the steps you’ll be taking either. People who are looking for each step they need to take, rather than looking for the mindset that welcomes challenge, will never find what they’re looking for.

Is This You?

Do you feel like you’d be willing to start taking more action if you had no worries about making a mistake, having to solve a problem, think creatively, or live with a healthy level of uncertainty? If it is, I’m going to tell you right now, priority number one for you needs to be accepting that life isn’t going to show you every step of the way, and it doesn’t have to. None of us are entitled to that, and in fact, real estate investing is possible because so few attempt to do it — mostly due to the fact there is too much uncertainty!

This all ties in to today’s blog post because I hear so many people asking the same question: What do I do once I get to ten loans and can’t get anymore? The question sounds practical, but it’s rarely ever helpful. In fact, the only people I ever hear ask this question are those who own very few, or no, rental properties at all. It’s a complete newbie question, because it’s rooted in the desire to know what you’re going to do 10 steps out, when really you just need to be taking step one.

Related: The Comprehensive Guide for Financing Your Very First Real Estate Deal

Am I encouraging reckless, irresponsible investing? No way. What I’m saying is that by the time you get to ten properties, you will have figured out the solution to where your next loan is going to come from. The learning curve for real estate is incredibly steep. You will learn so much from each property you buy it will blow you away. This is why we are always encouraging newbies to buy that first deal. In my experience, you just can’t understand how much you are going to learn until you do it.

Don’t Hold Yourself Back

Basically, if you’re not making progress, ask yourself if it’s because you are holding yourself back. Are you stubborn and refuse to move until you know exactly what to expect? Do you really believe that life is going to work that way for you in all things? Think about becoming a parent (I’ve never been one but I hear about it a lot). Isn’t there a massive amount of fear, worry, and stress that comes along with it — largely because you don’t know what to expect? In fact, you can’t know what to expect. It’s impossible! But for those who become parents, they always say it’s the best thing that ever happened to them and they wouldn’t trade it for the world.

Stop getting in your own way. You don’t need to know the answers to step 10 before you take the first step. There is absolutely nothing wrong with taking step one and then staying there until step two becomes clear and then repeating that process for step three. This is how entrepreneurs build businesses. This is how investors create products. This is how explorers find new lands. This is how all big accomplishments are made!

My guess is, you know exactly what you need to be doing already. As you read this, that little nagging thought starts popping up in your mind, reminding you what you know you should be doing. My advice is, stop lying to yourself. Stop saying you will take action but only when (fill in the blank) happens. That day is not going to come. You can’t see that part of the journey until you summit the mountain in front of you-the mountain is blocking your view. It’s only once you’ve climbed it that you can see what’s next.

This is How Success Works

Success in real estate isn’t any different. You’ve got to embrace this process, and this mindset, if you want to be successful. For those who do, huge rewards are available. With every step of the journey you take, you find there are less and less people keeping up with you because more and more of them stopped along the way when they couldn’t see 10 steps out.

Now, for those of you who just really want to know about the loan situation (even after reading all this), here’s your answer. You can have up to 10 Fannie Mae or Freddie Mac insured loans, and after four they get much more difficult to secure. If you hit your limit, you’ll simply start looking for portfolio lenders, commercial lenders, private money, or other options.

If you end up not liking that situation once you get to step 10, you can start flipping houses instead, explore selling with seller financing and holding the note, buying multi family property, or a myriad of other options. The thing is, you won’t know which option is best for you until you get there. So why waste time worrying about it now when you literally can’t do anything to help your cause anyway?

If you really want to help your own cause, focus on taking those steps faster than you have been previously. Make it a race to get to the top of that staircase and once you get there, slow down and think about what your best option will be for loan number 11. No matter what your decision ends up being, don’t let that decision slow you down from your ascent!

What creative ways have you used to finance loans?

Share in the comments below!

About Author

David Greene

David is a real estate investor/agent/author/entrepreneur/police officer in the CA SF Bay Area. David’s goal is to achieve total financial independence through real estate and to help as many others do so as possible. When not hunting bad guys, he hunts deals and loves talking real estate. To learn more about David, visit his website where you can also sign into his free investor’s newsletter and follow along as he walks you through his deals and shares his latest projects.

18 Comments

  1. Carol Register

    Your post is very encouraging! My real estate journey has not followed any “normal” patterns. I am invested overseas, as well as in the states. I have a Bed & Breakfast in southern Chile. Buying overseas has been steeped in uncertainty due to learning a new language, new culture and new laws. I took a chance and rented my property to managers. We terminated our contract earlier than expected. I am now rebuilding the business with some new ideas. I cannot see the road ahead, but I am enjoying the journey. It is another measured learning process, resulting from education and experience. I am now taking action, taking a risk. Thank you again for an encouraging post!

  2. Larry Russell

    Like Nike says “Just Do It!”. Great article and I’m with you on not worrying about how many loans I have as long as they’re cash-flowing rental properties. Also, I recently purchased your book on Audible and after listening to it, I purchased a hard-copy as well.

  3. Ali Hashemi

    Not what I expected to read when I opened the article, but pleasantly surprised. It’s good of you to remind us all that the fundamental fact of investing is that returns are directly linked to uncertainty. Higher risk investments also have higher potential returns. Many investors forget this. Uncertainty is a good thing when the investor is aware of that uncertainty and factors it into their decision.

    People who are afraid to take action because of risk are biting off too much. Calculating risk is a learned process. If you’re too afraid to jump into RE then start with $300 and invest in stocks. Volunteer to help another investor so you can learn. Those who can’t take the first step are trying to take too big of a first step. You have to learn how to take risk. Take a small risk, analyze the outcome, adapt, repeat.

  4. Peter Yi

    Why You Shouldn’t Worry About How Many Loans You Have in Real Estate
    by David Greene | BiggerPockets.com

    Is this the right article?

    I’d really like to know how to get multiple Real Estate Loans, not from HML.

  5. Jerry W.

    David,
    Great article. Another thing I would add is pick out a goal to keep you on tract. Don’t get me wrong, it is OK to change your goal as you make progress or even as you get education, but if yu don’t have a -place in mind you want to go, you won’t know what steps to take to get there.

  6. Cindy Larsen

    David,

    Great article. I especially loved the phrase “the mindset that welcomes challenge”. That is absolutely essential to succeed at anything. if you don’t believe you can succeed, surmount challenges, and solve problems, you are pretty much guaranteed to fail. If you do believe you can succeed and are willing to work at overcoming obstacles, you are very likely to succeed.

    I don’t see anything wrong with planning ten steps ahead, as long as (as you pointed out) you don’t let the planning get in the way of moving forward. I have researched lots of real estate topics that I haven’t yet found the need to actually use, (1031, s corps and other types of companies, solo 401k, UBIT and UDFI just to name a few) but, that education is never a waste.

    You just have to remember that “No plan survives contact with reality without changing”. I’m quoting someone who spent over 15 years successfully managing software projects and doing detailed project planning for some pretty large and complex projects with some pretty large teams: Myself. I first said that over 20 years ago. The more you know, and the more tools you have in your toolbox, the better able you are to adapt to reality when your plan hits a stumbling block. The goal usually doesn’t have to change, just the path to get there.

    This year I had a high level goal, and some supporting goals, that required me to use some of that extra real estate knowledge I spent time acquiring last year. My goal this year was to buy as many cash flowing properties as possible before the interest rates went up too much. For any new investors who are reading this, here is a peak inside my investing this year.
    Supporting Goals
    1. I wanted to engage my sons in my real estate business, give them a stake, and reward them for helping me out with my properties. I found out that I,had to buy a property for cash in order to do this, because, as I learned, the only way you can change ownership percentage of a property with a mortgage on it is to refinance. So, I created my first LLC to allow me to start wealth transfer to my sons: They currently each own 7% of a duplex I bought for cash. I currently own the other 86%. The plan is, at the end of each year, I take my percentage of the profits out of the LLC, and use it to paydown the mortgage on my highest interest rate investment property loan. My sons reinvest their profits. This results in their ownership percentage increasing over time (10 years from now, they should each own about 25% of the LLC, and I be down to 50%. Then it will accelerate.) Good thing I researched LLCs, partnerships, etc last year. Otherwise, I might have believed my lender when they said you can’t change ownership percentage on a property.
    2. I wanted to buy multifamilies in the 12-25 unit range. I learned a lot about commercial real estate loans, only to find that the multifamily properties in my price range were impossible to buy without putting at least 50% down. The problem was below market rents, and not well maintained properties: and less that 5 of them available at any time in a 100 mile radius. The commercial lenders will not approve a loan with a DSCR of less than 1.25%, so those low market rents meant there were no viable deals. Also, comerical loans for less than $1,000,000 are rare. Just try buying a $1.1 milliion 7 unit property, with below market rents. So I bought duplexes instead. That is easy because the lenders use the same criteria for small multifamily (4 units or less) as they do for single family houses. Finding the duplexes that cash flowed in areas where I could raise the rents was hard. Getting the loans just took shopping and endless documentation.
    3. The first purchase I made was two contiguous parcels with 2 duplexes on one, and one duplex on the other. I wanted to force appreciation by remodeling and/ or raising below market rents to market rent within a year. I had never bought property with tenants already in place. It has been a nightmare. Seven months later, I have turned over 3 of the 6 units and am about to turn over the 4th. Rents have gone up by over $200 per unit. I will not miss those tenants, except for one, whomunfortunately could not aford higher rent. Someday I’ll write an article about the journey with the problematic tenants. Suffice it to say, things did not go according to plan, and I learned a lot of lessons so that subsequent purchases with tenants in place have been much better handled. I make sure I get move-in move-out checklists from the seller, and if they don’t have them, that is the first thing I do with the tenants after I buy the property. I meet the tenants, talk with them, and find out if any of them have: criminal backgrounds, credit problems, drug problems, smoking problems, noise problems or cleanliness problems. Those first 3 duplexes had all of those problems. My leases are now much better, and cover such things as: who is responsible for outdoor spiders, wasps, and other insect control in the yard; who pays for the plumber when the tenants flush various objects; and vapeing. I have also learned that I don’t want any section 8 tenants and that there is a law taking effect at the end of september (washington state) that says I can’t discriminate based on source of income. However, I can have legal tenant selection criteria that the majority of section 8 tenants will not meet. As long as I apply the same criteria and process to all tenants, there is no problem.

    I am currently in escrow on two more contiguous parcels: 4 units on one parcel and two on the other. The most recent challenge is, it is a historic property, and the appraiser did a bad job of finding comps. So, there had to be a field appraisal, which pushed the closing date out a week. And the seller has a backup offer, for more than my agreed purchase price. If the Seller does not give me an extension of the closing date, what do I do? That was my position 3 days ago. Instead of panicing, I thought, and tried to find solutions that would let me close on time. Finally, I remembered reading about bridge loans when I was researching flipping last year. I looked on the bigger pockets website, made some calls, and ended up with a great bridge lender who also connected me with someone who is in the business of refinancing bridge loans immediately after you close on the property. Bridge loans are expensive. But quick, and with minimal paperwork. They can fund 3 days after you give them the minimal info they need, which you have already given to your other lender anyway.

    Fortunately the seller decided to give me a one week extension, and all should be well. If not, I have several,backup plans. Another challenge:;this is loans number 4 and 5, which have to close simultaneously (seller requirement) But, the loans are with two different lenders because you can’t have more than 4 loans with any one lender. And of course the different lenders want different last minute supplemental information. Going from preapproval to final approved loan docs is always a scramble for info you didn’t know you needed until the last minute.

    4. Another goal was to improve my property buying process and build a team. I eventually found a great real estate agent, lender, Insurance agent, and home inspector. A high quality reasonably priced contractor is still a challenge. I did improve my process. I found all of my properties on the MLS by reading every listing that matched my criteria, in detail, and then researching everything I could find online on the properties I liked, eliminating properties through a list of criteria like bad school districts, flood zones, being downwind of a mushroom farm, nearby superfind polution sites, etc. Then I made offers on all those that passed the online info stage, and that cash flowed using the bigger pockets rental property calculator. Since many of the properties had tenants, I often had to make offers based on just
    pictures without entering the property. I canceled several contracts based on in person visual inspection, without even getting my home inspector out to the property. It was a hot market. Lots of my offers got rejected in favor of people with cash offers or crazy offers that did things like waiveing inspections. I put escallation clauses in my offers. And speeded,up my offer process so I could offer within 24 hours of a property going on the market. I made enough offers that I ended up I putting twice as many properties under contract as I actually bought. I canceled contracts that my home inspector raised serious issues about. Once, I canceled a contract because, on the day I was to sign the closing docs, the sellers agent finally delivered a report on the decomissioning of the old underground tank for the oil furnace that had not been used in 15 years. My real estate agent tried to convince me it was all ok, and I should just sign closing docs. Instead, I extended the closing date, and did 3 solid days of researching and talking to people. I found out that it could have cost me $100k out of pocket plus possible lawsuits from the neighbors, if I had signed. My new real estate agent is great.

    So it’s been a challenging journey. But, challenges are kind of fun, and you always learn from them, as long as you are prepared to learn, and prepared to adapt your plan to meet the challenges you discover.
    The more knowledge you have, the easier it is to find solutions to problems. But first, you have to have an attitude that accepts challenges and solves problems. And, you have to believe in yourself and get back up when you get knocked down. Don’t give up. The key to succeeding at anything is to keep learning, and keep trying.

    My goal this year was to buy as many cash flowing properties as possible before the interest rates went up too much. When my current deal closes, I will have gone from one property with two units to
    7 properties with a total of 18 units, in 9 months. And through all of that, I have been managing the properties and helping with remodeling. I have lots of work left to do, but two weeks from now, my goal will have been achieved. That is, unless another challenge presents itself that I can’t figure out how to surmount. But I will try my utmost, and I believe I will accomplish my goal. If for some reason there is no way to buy this property, I have several more I am interested in, in the pipeline. Real estate investing is challenging, interesting, and fun.

    Cindy

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