Is there a limit on the maximum number of properties that I can purchased? I have excellent credit 800+, but a little cash. However, I qualify for a $350K house. My plan is to buy as many SFHs, as possible. But how do I keep adding properties when I only qualify for 350k? I’m sure when I purchase a SFH, the lender will pull my credit report and see other properties. Want the lender disqualify me if I already have another property? How can I get around this?
My plan is to buy as many SFHs, as possible. But how do I keep adding properties when I only qualify for 350k?
I think you need a much better plan. Simply buying as many SFHs as possible is not a good plan. I would suggest learning everything you can about the rental property business and then writing a short business plan. The way to write a successful business plan is to determine your monetary objective first and then work backwards to meet that objective.
To answer your question more directly. You keep adding properties by purchasing each property at a BIG discount to market and then borrowing 100% (or as much as possible) of the purchase price to preserve your capital. By doing so, with each property you buy, your net income (cash flow) and your net worth (equity) go up.
For example, let’s say that your net worth is currently $100,000 and your yearly income is $50,000. If you bought a SFH with a market value of $100,000 at a discount for $65,000, your net worth increases to $135,000. If you also did a proper cash flow analysis and the property is generating $100 per month in positive cash flow, then you’ve added $1,200 to your yearly income. If you were the banker, would you rather loan to someone with a net worth of $100,000 or $135,000.
Now let’s consider what happens after you’ve bought 10 of these properties. Your net worth would be $450,000 and your income would be $62,000. Would the banker rather lend to someone with a net worth of $100,000 and an income of $50,000 or a net worth of $450,000 and an income of $62,000?
As Yossi said, some lenders have limits on the number of loans they will allow you to have. That is especially true if the loans are being sold on the secondary markets. I have heard lenders say that their maximum number of loans is 4, and more commonly 10. The key is to use small local banks that keep their loans in-house (portfolio lenders).
My initial goal was to buy 10 rentals per year. I bought 10 the first year and have bought more than 10 each year since. I use two small local banks and have not had any problems to date.
The lender will also look at your income and how much of that you have left over after meeting your debt obligations. No matter how much equity you have in your properties, you won’t get the next loan if you don’t have enough income to service the new debt.
GMAC has a limit of 10 mortgages (not 10 properties)…i.e., if you have 5 properties, each with a 1st and 2nd, that counts as 10 mortgages…Quicken Loans also has similar guidelines…Other lenders have no limits…It’s case by case…
Do you have other properties? What did you do to qualify for the loan to purchase your other properties?
For your next property acquisition, the lender will take you through the same qualification process. The bottom line is if you don’t have enough disposable income to make the loan payment, you won’t get the loan.
FHA, Ginnie Mae, Freddie Mac, Fannie Mae, and the VA are agencies that limit the number of loans that you can get through them. You could have a loan through one of these agencies, but since it is serviced by another company, you might not even know it. The point is, you can continue to get conventional financing through private lenders even after you have exhausted your limits on agency loans.
BTW, I haven’t bought my first property yet. I’m looking to get in the market, but I’m seeing a lot of properties staying on the market longer. Does it make sense to buy now when the market is this sluggish (Dallas)?
But anyway, it sounds like I can’t quit my job for now. And if I “buy right” then I shouldn’t have worry about getting funding.
That’s good. It is critically important that you REALLY UNDERSTAND the business before you buy your first property. In the mean time, study and research the business; join your local REIA and make friends with the SUCCESSFUL investors in your area; and learn your market.
The vast majority of newbies fail in a short period of time. They fail because they pay too much for their property (due to lack of knowledge about cash flow and operating expenses) and they fail because they don’t know how (or can’t) deal properly with the tenants. You need to understand these issues before you start.
Visit your commercial bankers at your local banks. Most of the time commercial business loans do not show up on your credit report unless you are deliquent so your credit score isn’t going to get hurt everytime you get a new loan. Your closing cost are also far less. The downside is the LTV is 80%. I use private lenders for the 20% down. After renovations are done I refinance with to pay off the private lender.
Most of your local banks should have no problem lending on as many properties as you need up to around 1 million in loans for each bank as long as you can support it with your income and your credit score is decent.
Are you wanting to purchase for long-term appreciation or cashflow?
Your investment plan will determine the best financing options available. You might want to consider multiple unit apartments which can be purchased with one or two loans using business credit under an LLC. Just a thought. Then it won’t matter so much about your personal credit once you do the first deal… your company credit and the property cash flow will qualify for the future loans.
Of course if you’re in a rapidly appreciating market with good rental demand, a SFH portfolio can build equity quickly, but watch the cash flow figures since financing depends on net ROI. As always, make sure to buy right.
Long term appreciation and cashflow are not mutually exclusive. Indeed, there are three reasons to buy and hold rental property – Cash Flow, Appreciation, and Tax Benefits. Just remember the acronym CAT.
Rental property investors are not really buying a property more than they are buying the cash flow. They are buying the cash flow the property generates during the holding period and the big lump sum cash flow from appreciation when the property is sold. Tax benefits that may be derived from the rental property ownership are just a bonus.
Your investment plan will determine the best financing options available. You might want to consider multiple unit apartments which can be purchased with one or two loans using business credit under an LLC. Just a thought. Then it won't matter so much about your personal credit once you do the first deal... your company credit and the property cash flow will qualify for the future loans.
If WheresMyMoney already had an established LLC with a credit history, then commercial financing in the name of the LLC will depend upon the income the property glenerates and not upon his personal credit score. Unfortunately, WheresMyMoney does not have an established LLC so he will have to personally guarantee any loan his LLC may wish to obtain, so his personal credit score will matter for awhile.
Of course if you're in a rapidly appreciating market with good rental demand, a SFH portfolio can build equity quickly, but watch the cash flow figures since financing depends on net ROI. As always, make sure to buy right.
Actually, financing for a SFH will depend upon WheresMyMoney’s creditworthiness and his ability to pay the loan. His credit score and his net income will matter to the lender. For any rental property already in his portfolio, the lender will use the properties’ net cash flow to calculate WheresMyMoney’s debt/income ratios. They won’t even compute his ROI. This seems reasonable if you consider that the property that you purchased last week with only $1 down and has $1 in net cash flow has a 100% ROI on invested cash, but not enough net cash flow for the property to be self-sustaining. In the eyes of the lender, this property is a net negative cash flow.
Well, in this market I have no choice but to hold the property as long as possible. I don’t want to rent. So I think the next best choice is Lease Options. Since the TB will have an “interest” in taken care of the property. So, I’m looking for both cash flow and long term appreciation (~3 years). And I also get the tax benefits, if I choose to.
I have a sole proprietorship, which I will eventually convert to a LLC. So, I guess I will have to use my personal credit score for now.
Unfortunately, Texas “frowns” on Lease Options. Since, the state’s motto is “Don’t Mess With Texas”, I have to find an alternate way of doing LOs legally. And after reading other posts, I think I have. Also, this market (Dallas) is flat and the rental market is par. Therefore, I know I have to buy “right” and keep my debt down.
I’m pretty sure that’s not correct. Guidelines usually read that you can have “X” amount of financed properties. A first and second on a financed property would still be 1 financed property. I’ll double check throughout the week.