Creative Real Estate Financing
5 Ways to Use Leverage and Fund Your Next Deal
In This Article
- Why Invest in Real Estate
- Financing Options For Real Estate Investments
- How Many Mortgages Can You Have?
- How Multiple Property ROI Can Significantly Increase Your Cashflow
- Disadvantages of Multiple Mortgages
- Applying For Multiple Mortgages
- What is a Hard Money Loan?
- What is Cash-Out Refinancing?
- What Are Commercial Real Estate Loans?
- How to Invest in Real Estate With Financing Options Other Than Multiple Mortgages
- How Many Mortgages Can You Have? How To Determine What Is Right For You
- Continued Learning: Home Buying and Real Estate Investing
How many mortgages can you have?
If you’re looking to invest in real estate, one of your main questions will be how to pay for the properties.
Before you begin your real estate investment journey, it’s important to think through and plan your finance options, because there are many.
Whether your goal is to buy and hold multiple properties, manage a number of fix and flip projects or some combination of the two, you may want more than one mortgage.
This brings up the question “how many mortgages can you have at one time?”
In this article, we’ll explore the concept of multiple mortgages, along with:
- Reasons to invest in real estate in the first place
- Answer the question “how many mortgages can you have?"
- How to apply for multiple mortgages — and how many you can apply for
- and more
Let’s get started!
Why Invest in Real Estate
Before we break down how to finance properties and answer the question “how many mortgages can you have”, it’s important to understand why people invest in real estate in the first place — and the incredible financial benefits that can come from it.
The great thing about real estate is that you can do it on your own schedule. For some, real estate investment is a side-gig that they grow gradually over time, alongside their career. For others, real estate investment is a full-time commitment and is run as their business.
The reasons that people get interested in real estate investment include:
- A desire to invest in something that is tangible, unlike stocks and bonds, which are more difficult to understand and evaluate.
- Improved return on investment (ROI) that can be used as retirement savings or income, due in part to the tendency of home values to rise over time.
- Opportunities that present themselves unexpectedly (such as an inherited property with good rental potential).
Next, let’s look at the financing options for real estate investing.
Financing Options For Real Estate Investments
Regardless of why you get into real estate investing, you will need finance options in order to sustain and grow your business.
Financing will allow you to:
- Acquire more properties to expand your portfolio
- Tap into equity in existing properties
- Make needed repairs or renovations on properties you own
- Optimize cash flow by refinancing properties when rates are low
Fortunately, there are a variety of ways in which you can finance your real estate investments.
The first you may be familiar with already if you have purchased a home: conventional mortgages. A conventional mortgage offers the following:
- Availability of a long-term, fixed interest rate
- Low or no mortgage insurance requirement
- No up-front premium requirement
If you are trying to finance multiple investment properties, however, you may struggle to find a bank or other lender who is willing to provide a mortgage on investment property.
In addition, it can be difficult to answer the question “How many mortgages can you have?” in a conventional loan situation, since so much can depend on the individual lender, their underwriting guidelines, and the current state of the financial market.
There are alternatives to conventional financing. This can include the following:
- Seller financing
- Private money lending
Any of these options can help you expand your real estate investment portfolio without worrying about the limits placed by conventional lenders.
We’ll explore each of these later on in the article.
How Many Mortgages Can You Have?
So how many mortgages can you have at once in order to do this? Can you have more than one mortgage?
Yes, you can have more than one mortgage. For most traditional lending institutions, the short answer is four.
Generally, with good credit and a solid down payment, you should be able to finance up to four properties.
There are even circumstances in which a lender may lend on more than four properties. In 2009, Fannie Mae raised the financed-property limit from four to ten. But there are significant requirements to this process, making it difficult and rare to obtain.
We’ll look at how to apply for multiple mortgages later on in this article.
How Multiple Property ROI Can Significantly Increase Your Cashflow
Why invest in real estate with mortgages anyway, you may be asking. After all, isn’t it better to be debt-free?
Putting other people’s money to work for you can greatly increase your cash flow and potential ROI — an example of what we call “good” debt.
Good debt is money you’ve borrowed to make an investment in an asset that will produce income.
Good debt is “good” because you'll earn more money than the debt costs you.
Let’s look at how this process of investing in real estate with multiple mortgages works.
Let’s say that you have $100,000 to invest and the average purchase price in your chosen market is $100,000.
You pay cash for one property, which returns $800 per month in rent.
After expenses, such as taxes and homeowner’s insurance, you clear $725 per month in net cash flow.
Now, imagine that you took that same $100,000 and financed five similar properties with down payments and out of pocket expenses of $20,000 each.
Each offers that same ROI of $725/month with a monthly mortgage payment of $520 on each property.
Now, instead of clearing $725 per month you are clearing $1,025 per month and building equity in five properties each month.
Every year or two, you’ll be able to increase your rent, thus increasing cash flow while the amount you pay in carrying costs remains more or less the same.
At the same time, those properties will increase in value. The annual appreciation rate for real estate is 3.7%.
That means that in 30 years, your properties will each be worth approximately $300,000.
Instead of one $300,000 property, your portfolio value would be worth $1.5 million.
That’s a huge difference!
That is a smarter use of your money both in the short term and the long term.
This example shows why it’s important to be able to finance more than one property at a time.
Disadvantages of Multiple Mortgages
Now that you know how many mortgages you can have and you know the advantages of multiple mortgages, let’s consider the disadvantages.
If you have more than one mortgage, refinancing may be difficult. With more than one mortgage your LTV (Loan-To-Value) ratio is likely to be high, making it harder to get the loan.
When you have multiple mortgages, you may also have multiple fees such as closing costs, a home appraisal, and origination fees. Sometimes the fees overshadow the benefits of getting another mortgage.
But the main disadvantage of multiple mortgages is that you are using your home for collateral, and your home could wind up being repossessed if you can’t meet your multiple mortgage payments.
Applying For Multiple Mortgages
Applying For Your First Four Mortgages
Now that you know the answer to “how many home loans can you have”, let’s explore how to apply for your first four mortgages.
When you are starting out to obtain financing on your first four properties, you will want to determine whether to work with a lender directly or with a mortgage broker.
In either case, remember that the bulk of their client base is probably made up of individuals and couples applying for one mortgage on their primary residence.
Find out whether they have experience working with investors so that they are better able to understand your goals as you move through the application and underwriting processes.
Here is why that is important: a mortgage broker experienced in real estate investment may be a good option if he or she is already familiar with lenders who are willing to provide loans on multiple properties.
Be sure and ask the broker about relevant experience with real estate investors and portfolios. In addition, you might ask if your broker currently holds any investment properties personally.
If this is the case, they can make recommendations based on their personal experience.
While banks are allowed to loan multiple mortgages to the same individual, many investors find the big banks less willing to make multiple loans.
Keep in mind that in order to have mortgages on up to 4 properties, the bank will require:
- Good to excellent credit score
- Your loan-to-value (LTV) is in the 75% to 80% area
- Your current rental properties are doing well and bringing in cashflow
According to Roofstock, getting more than one loan is similar to the process of obtaining your first loan. It includes:
- Long-term, low fixed interest rate
- Low or no mortgage insurance premium required, depending on the size of your down payment
- No up-front insurance premium required
- Proof of income from W-2s or tax returns, statement of assets and liabilities
- Financial statements on any existing investment properties, including P&L, rent roll, and existing loan information
Depending upon your financing needs, you may want to consider a smaller, local or independent bank if you are looking for more open-minded and adjustable policies.
By working directly with a smaller bank, you may have more room to discuss and negotiate throughout the process.
Applying For Mortgages Five Through Ten
Yes, the answer to how many mortgages can you have is four, but Fannie Mae actually provides guidelines for lending on up to 10 properties for real estate investors.
However, banks that are trying to protect their assets create policies that make it almost impossible to obtain a loan on that many properties.
Once you are past four mortgages, underwriting guidelines tighten considerably. This is important to consider when wondering the question "how many mortgages can you have?"
In this scenario, you may be asked to provide most or all of the following:
- 25% down payment on each property or 30% on duplexes, triplexes, and quads
- A minimum credit score of 720
- No late mortgage payments on any property within the last year
- No bankruptcies or foreclosures in the last seven years
- Two years of tax returns showing all rental income from all properties
- Six months of cash reserves to cover principal, interest, taxes, and insurance (PITI) on all properties
These strict guidelines can make it nearly impossible to finance additional loans through a traditional lender.
But there are other options, such as:
- Blanket mortgage
- Portfolio loans
- Hard Money Loans
- Cash-Out Refinancing
- Commerical real estate loans
We’ll look at each one next.
What Is A Blanket Mortgage?
In the event that you want to own multiple properties while using mortgages for financing, you can utilize what’s called a “blanket mortgage” instead of individual mortgages.
This type of mortgage pools all your investments under a single financial agreement.
A blanket mortgage makes the paperwork, monthly pay system and overall hassle much easier.
This includes high rates and fees and the fact that every property serves as collateral for the others, making a default a very scary proposition.
What Is A Portfolio Mortgage?
In the case of portfolio loans, a lender loans money to a borrower and keeps the debt on their portfolio to earn consistent interest on the loan — it’s not sold to other lenders.
This is different from conventional loans, because they are sold by the bank originating the loan to another lender who will service the loan.
Although portfolio loans are approved quicker than a conventional loan, the interest rates are usually higher.
What is a Hard Money Loan?
When you get a hard money loan, your property secures the loan. The lender, usually a private individual or a company, not a bank, may not consider your financial position or your credit. The loan is based on the property as collateral.
Hard money loans are sometimes a better option than multiple mortgages for a number of reasons.
While traditional mortgages — and multiple mortgages — can take months to process, hard money loans may come through in days.
Hard money lenders evaluate the equity in the property, not your credit or financial position.
Hard money loans can benefit real estate investors if the lenders base the loan amount on after repair value (ARV), which may be higher than the purchase price.
Also, with a hard money loan, there are low documentation requirements compared to conventional mortgages.
Higher interest rates and high equity requirements to make up for the fact that they may be riskier for the lender.
Hard money loans are usually shorter-term than mortgages.
You will pay higher origination fees, generally from 1% - 5% of the loan amount.
The property is collateral, so you may lose the property if you default on your payments.
What is Cash-Out Refinancing?
Cash-out financing is a way to turn some of the equity in your property into cash.
Cash-out financing happens when you refinance your existing mortgage loan and you wind up with money in your pocket. In that case, the new mortgage is for a larger amount than your previous loan, and you get the difference.
A cash-out refinance is just one loan, compared to other ways of leveraging your home equity like taking out multiple mortgages.
With a cash-out refinance, you may get a lower interest rate compared to the rate on your existing mortgage.
You will gain access to funds to help with major expenses like renovations or college tuition.
Cash-out refinancing can help you consolidate your debt and pay off high-interest credit card debt, resulting in a higher credit score by reducing the amount of credit you are using.
A cash out refinance can put you at risk of foreclosure if you can’t make the payments.
Your interest rate and fees may change, and you will have upfront closing costs.
You might end up paying more in the long run with a new 30-year mortgage, even if the rate is lower.
A cash out refinance takes time to go through underwriting.
What Are Commercial Real Estate Loans?
When you take out a commercial real estate loan, it is secured by a commercial property as opposed to a residential property.
Commercial real estate is an income producing property used for a business, like:
- an apartment
- an office
- retail space
Investors use commercial real estate loans to purchase commercial property, lease it out and collect rent from businesses.
When you are considering financing for a commercial property, it may be easier to get multiple mortgages than a traditional commercial mortgage.
Traditional commercial mortgages have no maximum loan amount since they are not backed by the government.
The time frame varies from six months to fifteen years, so you can tailor the loan to your needs.
It can be harder to qualify for a traditional commercial mortgage compared to a government-backed loan because the lender takes the full risk.
How to Invest in Real Estate With Financing Options Other Than Multiple Mortgages
Whether you are reaching the point where you can no longer find financing from bank lenders or simply want to expand your options for financing, there are a variety of other ways to fund your real estate deals other than using multiple mortgages.
- Seller financing
- Private money lenders
We’ll look at each in depth next.
If you find a motivated seller, you may be able to negotiate seller financing for your investment property.
This means that the seller allows you to make payments each month rather than requiring you to take out a loan and finance the property, at least at first.
Seller financing usually involves a large up-front down payment and a shorter payoff term than traditional financing.
For example, a seller may require you to pay within five years rather than the conventional mortgage’s 30-year period.
If you don’t have the money on hand, this will require you to obtain another type of financing within that five year period or risk losing the property.
Seller financing can be a good option if you want to get a property producing income quickly and the seller is also under a time crunch to produce income from the property.
It’s also a way for sellers who want to sell as-is to avoid paying for bank-required repairs and improvements in order to sell their property through traditional financing.
Private Money Lenders
Another option is private money lenders. There are private financiers who work with real estate investors regularly and fund their fix and flip or buy and hold projects.
With private money lenders, you never have to ask the question “how many mortgages can you have”.
You’ll also have the advantage of their expertise and, in many cases, their professional network should you need assistance or advice on developing your project.
Another perk is that if you can still utilize private money lending even if you have a poor credit score.
Keep in mind that private financiers often require large down payments and a higher interest rate on the money they lend.
In terms of the underwriting and approval process, you’ll often find them far easier to work with than a traditional lender.
This alone is an attractive prospect for new real estate investors.
Because they understand the real estate investment field, you will be able to communicate with private financier far more easily than you can communicate with a bank things such as:
- the value of your project
- your planning
- your experience
In addition, private financiers will generally work with you directly while banks have layers of bureaucracy between you and the decision makers.
Finally, working with a private financier offers you the ability to enjoy consistent, reliable financing.
Once your financier finds that you are able and trustworthy, he or she will be happy to lend to you again and again.
Thus, you no longer need to wonder how many mortgages you can have since a private financier will not set arbitrary limits.
How Many Mortgages Can You Have? How To Determine What Is Right For You
So how many mortgages can you have?
Determining which finance option is right for you depends on a number of factors, including:
- your real estate investment strategy
- your experience level
- your personal resources
You will want to consider your own values and preferences.
Either way, it’s good to know the answer to the question: how many mortgages can you have?
If you don’t like mixing personal and business, you may not want to borrow from family and friends.
Or if you are just starting out, you may want to favor the lower interest rate and predictable terms of a bank or traditional mortgage lender.
Ultimately, what is right for you is determined, in large part, by the following:
- What helps you get deals done
- What helps you optimize your timeframe
- What allows you to preserve optimal cash flow
- What works for the way you prefer to invest
Remember, there are always deals to be had and there are always investors who are looking for a good return on their investment.
When you focus on buying at the right price and maximizing the income from your investments — that is, becoming a more skilled and expert investor — you will find people willing and eager to invest in you.
Continued Learning: Home Buying and Real Estate Investing
Now that you know an answer to the question “how many mortgages can I have”, learn more about real estate — from buying your own home to investing in real estate — with these free resources:
- Check out this The Beginner's Guide to part-time or full-time real estate investing
- Discover 7 ways to Invest in real estate with little money
- Start a free trial of DealMachine to “drive for dollars” and acquire off-market deals
- Find out how to fix and flip a property in 7 steps