If you have been toying with the notion of investing in real estate, you probably have a variety of questions that you want answered before you sign on the dotted line for your first deal.
Whether your goal is to buy and hold multiple properties, manage a number of fix and flip projects or some combination of the two, one of those questions may be “how many mortgages can you have at one time?”
Before you begin your real estate investment journey, it’s important to think through and plan your finance options, because there are many.
Read further to learn how to get started investing and how to find the sources you need to finance your deals as you grow your real estate portfolio.
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.
For some people, 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).
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.
How To Invest In Real Estate with Multiple Mortgages
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. Here’s how this process works.
Multiple Property ROI
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. Thus, instead of one $300,000 property, your portfolio value would be worth $1.5 million.
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.
How Many Mortgages Can You Have?
So how many mortgages can you have at once in order to do this?
For most traditional lending institutions, the short answer is four. There are circumstances in which a lender may lend on more than four properties, but these are rare and hard to find.
Generally, with good credit and a solid down payment, you should be able to finance up to four properties.
Applying For Multiple Mortgages
Applying For Your First Four Mortgages
Now that you know the answer to how many mortgages 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.
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.
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.
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, making the paperwork, monthly pay system and overall hassle much easier, though there are drawbacks. This includes high rates and fees and the fact that every property serves as collateral for the others, making a default a scary proposition.
How to Invest in Real Estate Via Other Financing Options
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. This includes the following:
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. 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 get some income from the property.
It is 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
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.
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 the value of your project, your planning, and your experience to a private financier far more easily than you can communicate with a bank.
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 to Determine What is Right For You
Determining which finance option is right for you depends on a number of factors, including your real estate investment strategy, your experience level, and 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.
The Chief Investment Officer of Summit & Crowne, a real estate investment firm in Atlanta, Abhi Golhar has been investing in real estate since 2002.