Rentals: Financing and managing more than 4 properties

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Real estate investment property has long proved an effective strategy for building wealth. But as your number of rentals increases, so do the challenges. There are several ways to finance more than four properties:

1. Fannie Mae’s 5-10 property mortgage
2. A “blanket” mortgage allows you to finance multiple properties with one loan
3. Portfolio loans drop the four property limit and you may not require you to prove your income

You may also face challenges managing more rentals. Hiring a property manager may save you time and money.

Fear not: funding is available

Want more rentals? Then you need to own more rental properties. But many banks and lenders don’t like to finance multiple investment properties at the same time. That’s because doing so increases their lending risk. Their thought? Creating and managing all these loans for one client is too much hassle.

Related: Financing more than 4 properties with Fannie Mae

Thankfully, several options exist for borrowers seeking to own more than four rental properties. Fannie Mae and Freddie Mac offer loan programs. Or, you can pursue a blanket mortgage or portfolio loan.

If you’re eager to expand your ownership portfolio, shop around and weigh your choices. Find out what you qualify for. And know what you’re getting into before committing. Owning multiple rentals can provide a lot of rewards, risks and responsibilities.

Option 1: Fannie Mae

Fannie Mae’s 5-10 Properties program allows you to finance five to 10 properties at the same time. These can include rental properties. But you have to meet the following criteria:

• Own between five and 10 residential properties, each with financing attached
• Pay 25 percent down for a one-unit purchase; pay 30 percent down for a two- to four-unit purchase
• Accrue 30 percent equity for all property types (one-, two-, three-, or four-unit) when pursuing a refinance
• Have a minimum credit score of 720
• Avoid any mortgage lates within the prior 12 months on any mortgage
• Have no bankruptcies or foreclosures in the prior seven years
• Provide two years of tax returns indicating rental income from all rental properties
• Accrue six months of reserves for PITI (principal, interest, taxes and insurance) on each of the financed properties
• For more info, read Fannie Mae’s multiple financed properties checklist

Note that Fannie Mae also allows you to take cash out from a home purchased free-and-clear at auction or otherwise. You can use this “delayed financing” rule to get more cash and buy more properties.

Option 2: Freddie Mac

Freddie Mac offers its Investment Property Mortgage program. This allows you to finance up to six one- to four-unit properties, including your primary residence. But you must meet strict criteria (see section 4201.16 of the guide, on page 282), including:

• Use your primary residence’s monthly housing costs to calculate your monthly housing expense-to-income ratio
• Have a minimum credit score of 720
• Pay 15 percent down for a one-unit purchase; pay 25 percent down for a two- to four-unit purchase
• Accrue 15 percent equity for one-unit properties and 25 percent equity for two- to four-unit properties when pursuing a refinance
• Don’t exceed a max debt-to-income ratio of 45 percent for manually underwritten mortgages
• Set aside two months reserves for PITI for any two- to four-unit properties
• Treat the aggregate negative rental income from all rental properties as an obligation; this will be considered in calculating your monthly debt payment-to-income ratio
• Accept no gifts from a relative or gifts/grants from an agency to use in your funds
• If rental income is not used to qualify, use the monthly payment amount for the mortgaged premises, plus operating expenses, to calculate your monthly debt payment-to-income ratio

Option 3: a blanket mortgage

A blanket mortgage funds two or more properties within one loan. That means you only have to pay one set of fees and closing costs to finance multiple rental properties. The properties are held as collateral on the loan.

The good news: this mortgage comes with a release clause. You can sell one of your rental properties and use the proceeds as you see fit—even to buy another property. You don’t have to use the gains to pay down your loan.

Related: Why landlords should consider a blanket mortgage

The bad news: if you default on one property, the lender could try to claim all your properties covered by the loan.

Also, “Blanket loans often have a number of restrictions and prepayment penalties. They can also have onerous release clauses if you want to sell a property,” says Realtor and real estate attorney Bruce Ailion.

Option 4: a portfolio loan

Got turned down by Fannie Mae, Freddie Mac or a blanket mortgage lender? Try a portfolio lender. These are often smaller private banks, financial firms or investors.

Related: What is a portfolio loan?

What makes a lender a “portfolio” lender is the fact that it does not sell its loans to investors the way Fannie Mae and Freddie Mac lenders do. It holds its loans in its own investment portfolio and assumes all of the loan’s risk. That allows a portfolio lender to create its own guidelines.

Getting approved for a portfolio loan can be easier. These lenders may not limit the number of rental properties you’re interested in buying, either.

“I know lenders who allow up to 20 financed rental properties,” says Brian Emerson with Edge Home Finance Corporation.

Understand that portfolio lenders may charge higher interest rates and fees. Compare all loan rates, costs and terms carefully.

What to consider before financing over four rental properties

Prior to taking the multiple rental properties plunge, consider these tips:

Try many different lenders.

“Look to local banks and credit unions that like to service small businesses,” Joshua Harris, clinical assistant professor of real estate at NYU’s Schack Institute of Real Estate, says. “Also, explore private lenders who have a history of funding mortgages to local landlords.”

Find an expert you can trust.

“The problem with financing multiple properties is not that financing isn’t available. It’s finding an expert who knows how to do these loans,” Emerson says. “Choose and work with an experienced mortgage broker with the knowledge and skills to get the job done.”

Related: Investment property rates (How much more will you pay?)

Get help.

“Decide how full-time you want to be in your real estate business,” Harris adds. “More properties mean more tenants, maintenance issues and work. Think about hiring professionals to lease, maintain and manage your properties.”

Prepare to abide by more rules. “If you own more than four properties, you become subject to fair housing laws. Not knowing the law can be very expensive,” Ailion says.

When you’re a serious property investor, you probably work with a team — real estate agents, attorneys, title professionals and property managers. Your lender should also be an important and valuable member of that team.