Learning how to buy multiple rental properties and build a real estate portfolio doesn’t have to be daunting. Implementing a system that includes projecting, planning, and building a real estate investing team will streamline your efforts. Learning how to finance multiple investment properties will help you build your real estate empire.
If you haven’t learned how to buy your first investment property, you’ll want to start at the beginning of this guide and follow your real estate investing journey chapter-by-chapter. If you’ve already purchased at least one rental property and have the same question I asked my real estate mentor regarding “How to buy the next property,” then read on.
My Story
When I first learned how to invest in real estate in 2005, I hired a real estate investing coach. He advised me how to buy my first rental property, and I asked, “How do I buy the second property and the one after that?” What I was asking was how to build a real estate portfolio. A real estate portfolio is a collection of multiple investment properties.
I used fixed-rate conventional financing to buy my first property by squirreling away money to save a down payment. It was hard because I had to delay gratification, cut expenses, and reduce spending on things I wanted. I learned to live on 75% of my income while stashing 25% away in a money market account due to its liquidity. It took me about eight months to save my down payment.
My strategy for buying my first property probably wouldn’t work for building a real estate portfolio. After all, my take-home pay was average. I later learned other strategies to finance multiple rental properties that weren’t dependent on my salary. Whether you want to build a small real estate portfolio or you’re wondering how to build a real estate empire, there are other financing options in addition to conventional financing.
Build a Real Estate Portfolio
To buy a second property, you’ll repeat the same process for buying your first rental property that we covered in the chapter, Buying Investment Properties. The only difference between buying one or multiple investment properties is the type of financing and how you’ll manage multiple properties. Many of the financing options we covered in the chapter, Investment Property Financing Made Easy work for buying multiple rental properties.
With your first rental property stabilized and generating positive cash flow, you can reinvest profits into other properties. If the property has 30% or more equity, you may be eligible for a home equity line of credit or cash-out refinance. Portfolio loans and hard money loans are also good options. When financing multiple investment properties, you’ll encounter different underwriting and approval criteria, and likely need six months of property expenses in reserves plus a down payment.
Juggling multiple rental properties requires systems for managing your investments that include hedging against liability and working with a team of professionals. To learn more, revisit the chapters Building your Real Estate Investment Dream Team and The Ultimate Real Estate Investor’s Property Management Library.
Rental Property Mix
When evaluating how to buy multiple rental properties, you should consider the types of properties you want to own and manage and how much positive cash flow you want to earn from each property and in total. In the chapter, Types of Investment Property, we go in-depth on investment property types.
You can buy one type of investment property or build a mixed portfolio. Ideally, with a mixed portfolio, you want to include similar property types since laws vary by type, making it easier to manage. For example, you could own residential housing that consists of a duplex, triplex, and fourplex or a mix of single-family homes and apartment buildings, staying within the residential property type. My first property was a four-unit residential building and, later, I bought a lakeside vacation rental.
Stabilizing & Seasoning Rental Property
Stabilizing rental property involves filling vacancies, lowering tenant turnover, collecting market rents, and minimizing capital improvements. When applying for a home equity loan or line of credit, most lenders prefer a fully stabilized rental property. Some lenders require a six- to-12-month seasoning of your first loan before they’ll loan on another rental property.
Some private money and portfolio lenders don’t require a seasoning period, but these loans can have higher rates, more fees, and shorter terms. For a cash-out refinance, lenders who do require a seasoning period will likely want a minimum of 40% equity in the property (80% of the original loan amount, not purchase price). Portfolio lenders may be less stringent in these requirements, so you have to shop around.
You may not want to wait. However, if you’re new to investing, taking the time to stabilize your rental property during the lender’s seasoning period is time well spent. You’re going to learn about managing tenants, rental property finances, and maintenance and repairs. Your life will be easier doing this with one rental property before piling on others. You will make mistakes. I found my biggest mistakes were what made me a better landlord.
Find & Evaluate Rental Properties
Once you’ve decided which types of properties and how many you want to manage, you can begin finding properties and doing your due diligence to ensure positive cash flow. To learn how to do this, check out the chapters Find Investment Properties for Sale and The 5 Phases of Real Estate Due Diligence.
You can find properties on Realtor.com, Zillow, Redfin, LoopNet, and broker websites. Your agent can set up a subscription based on your property criteria that comes straight to your inbox. There are also tools like DealCheck that will evaluate properties for you. In addition to evaluating listed properties, look at what has recently sold and properties that have been on the market for a long time to get a better sense of pricing.
Rental Property Cash Flow Projections
Cash flow projections create a time-oriented roadmap, avoid wasteful spending, and help you get a good picture of whether your plan is profitable. When thinking about how to buy multiple rental properties, focus on positive cash flow and not equity or appreciation as these fluctuate.
The goal of your projection is to develop a profitable business, so if expenses exceed revenue consistently, you’ll need to review and evaluate how to increase income or cut expenses. You also may need to increase expenses by advertising vacancies or doing renovations, repairs, and upgrades that will command higher rents and greater profitability. In the chapter, Why you Need a Real Estate Business Plan, we provide a sample rental property cash flow projection.
Key Metrics for Evaluating Rental Properties
There is no one-size-fits-all formula for calculating whether a rental property is a good investment, so you’ll want to use a variety of metrics. Three key metrics investors often use to evaluate a rental property are the capitalization (cap) rate, cash-on-cash return, and return on investment (ROI).
3 Key Metrics for Evaluating Rentals
Key Metric | How It Works |
|---|---|
Expected rate of return on real estate. It uses net operating income; doesn’t include mortgage debt. | |
Cash-on-cash return | Annual rate of return in relation to the amount of financing paid during the same year. |
Profit made on an investment as a percentage of the cost of the investment. |
Using metrics to determine an investment property’s performance can help you avoid costly mistakes and help you stick to the goals you set in your cash flow projections.
Finance Multiple Rental Properties
Investors seeking financing for more than four rental properties run into the challenge of lenders not wanting to lend on more than four properties due to perceived risk, so you’ll need to get creative if you plan to own more than four investment properties. There are many places to find investment property loans to build your portfolio. We’ll cover a few here and in Investment Property Financing Made Easy, where we provide a database of articles and information for how-to finance multiple investment properties.
Rental Property Financing Options
Financing Type | Best For |
|---|---|
Fast, short-term financing | |
At least 40% equity in a primary residence | |
Credit scores above 660, 20% to 30% down payment, fixed interest rate | |
Less stringent credit or fewer property requirements | |
Creative, short-term financing | |
Borrowing against retirement funds for a down payment or purchase | |
Property rehab skills and substantial equity after repairs | |
Moving into investment property while renting primary residence | |
Reinvesting rental property profits into additional properties | |
Buying multiple properties and later refinance or sell | |
Investment properties with 40% to 50% equity |
Hard Money Loan
Hard money loans are short-term, interest-only mortgages used by investors to purchase properties. These loans have higher rates of up to 12% but can fund in 15 days. You’ll typically need to repay the loan within 12 months or obtain permanent financing, but it is still a great choice for securing your first rental property. For this reason, hard money loans are typically best for investors who need fast, short-term financing.
Home Equity Loan
A HELOC is a revolving line of credit collateralized by real estate. The maximum limit for a HELOC is based on the amount of equity in the property and typically will not exceed 70% to 75% of the property’s value. LOCs for investment properties tend to have higher interest rates than a HELOC on your primary residence and are harder to obtain because lenders view them as riskier.
Conventional Financing
Conventional financing includes loans that conform to guidelines set by Fannie Mae and Freddie Mac and are backed by the federal government. For investment property, lenders require a 25% down payment. Your credit score, credit history, and personal finances will be considered for loan approval. Rental income from the prospective property is not considered as part of your income, but income and expenses from existing properties may be used to qualify.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac offer government-backed programs that allow investors to buy up to 10 properties with conventional financing. Fannie Mae’s programs allow investors to buy and finance up to 10 residential rental properties, and Freddie Mac allows up to six one-to-four-unit residential properties. While these sound ideal, investors have found it difficult to find lenders who will loan above four properties.
Portfolio Loan
Portfolio loans don’t meet Fannie Mae and Freddie Mac guidelines. Because they can’t be sold on the secondary market, portfolio lenders carry the risk. Portfolio lenders charge higher rates and create their own underwriting guidelines. Portfolio loans are used by investors who don’t qualify for traditional financing due to owning too many rental properties or having low credit scores, which makes them a great option for investors who have already acquired several properties.
Owner Financing
Owner financing is when a seller acts as a lender. Owner financing provides buyers with easier terms than a traditional mortgage while giving sellers monthly income. Owners will finance a term for up to five years, although some may finance longer. Sellers offering owner financing may want to hold the primary lien against a property or charge a higher interest rate. Owner financing is good for buyers who need creative financing.
Using Retirement Account
If you’re self-employed, you can use a self-directed solo 401(k) to buy investment property. If you have a retirement account through your employer, you can use a self-directed individual retirement account (IRA) for investment property. There are some restrictions and potential penalties, so make sure to contact your retirement plan administrator before tapping retirement.
The BRRRR Method
The BRRRR method means to buy, renovate, rent, refinance, and repeat. You’d have to get a great deal on a property that needs work, renovate it, secure tenants, and do a cash-out refinance to get funds to buy the next property, repeating the process to build your portfolio.
When you refinance, you’ll need enough equity in the property for the lender’s loan-to-value (LTV) ratio. The rental income from the BRRRR property needs adequate income to cover the new loan while still generating positive cash flow.
Buy a Second Home
If you buy an owner-occupied investment property, you can get low rates and a down payment as low as 3.5% through the Federal Housing Administration (FHA). Start by using the rental income from the other units to cover your mortgage and move in a year or two into another rental property while renting your former unit. Some lenders require borrowers to live in the owner-occupied investment property for a minimum of one year. You will still need a down payment for the next property.
1031 Exchange
The federal government created the 1031 Exchange tax code to encourage real estate investing. Section 1031e allows investors to reinvest profits from the sale of a non-owner-occupied investment property into up to three other investment properties and avoid paying capital gains and depreciation recapture.
Blanket Mortgages
A blanket mortgage is a single loan that covers multiple investment properties. Blanket mortgages may be used to finance a residential investment property portfolio or a subdivision. Although a blanket loan can have a 30-year loan term, it is more common to find a short-term loan of up to five years that is amortized for 30 years, in which case investors would want to refinance their rental property before the loan balloons.
Cash-out Refinance
If you finance your investment property with a hard money loan or other short-term financing, you may want to consider cash-out refinancing to pay off these short-term loans or to purchase additional investment properties. Cash-out loans are a type of long-term financing with fixed monthly payments that are used to replace interim short-term financing.
ROI & Borrowing Against a Property
When borrowing from equity, you’ll want to consider your return on investment. Return on investment (ROI) is the return on your total investment in the property, including both cash you invested and any money you borrowed against the property. If you increase debt with a cash-out refinance by drawing from the equity in one property to purchase another, it will affect your ROI and your positive cash flow.
You can also examine the ROI and cash flow on the second property and estimate if it could potentially cover the debt from the first property. In either case, make sure if you pull equity out of any rental property, it doesn’t consume your positive cash flow. You want to make sure this step is in alignment with your cash flow projections and goals before moving forward with another rental property.
Managing Multiple Rental Properties
You will need to decide to self-manage the properties or hire a property management company. If you hire a management company, you’ll likely pay between 4% and 10% of the gross rental income in property management fees. You’ll also pay for repairs and maintenance. If you manage multiple properties by yourself, it’s wise to set up a separate management limited liability company (LLC).
Whether you or someone else manages your rentals, you’ll also need processes for handling money, expenses, and tenants. Management companies or property management software can handle tenant-related issues, property maintenance, banking and finances, escrow deposits, and paying bills as well as provide an additional layer of liability protection.
In addition to having liability insurance and the management LLC, it is a good practice to put each property into its own legal entity to further hedge against liability. The LLC is often used, but some owners put their properties in realty trusts or their spouse’s name. Be sure to consult with an attorney and accountant about which entities are best suited to you.
Tips for How to Buy Multiple Rental Properties
Buying and financing multiple rental properties begins with understanding investment property financing and how to manage multiple investment properties. We’ve reached out to the experts for their best tips for building a real estate investment portfolio.
Here are five tips for buying and financing multiple rental properties.
Alternatives for How to Buy Multiple Rental Properties
In addition to the different types of rental properties mentioned, there are other ways to invest in rental properties and receive passive cash flow from real estate, sometimes without even owning the physical property. These types of investments can become all or part of your portfolio, depending on your goals.
Buy an Apartment Complex
While buying an apartment complex is still owning physical rental property, it is a good alternative to owning multiple rental properties because you diversify the income across many units, rather than across many properties. You also will only need to get funding on one property instead of stabilizing each building before moving forward with the next.
Crowdfunding Multiple Rental Properties
Real estate crowdfunding pools small amounts of money from multiple investors to finance a property or portfolio of properties. Funds are invested in either debt or equity in return for a portion of the project, and investors are paid in monthly dividends. In some cases, an investment can be as low as $500, providing very low risk to the investor.
REITs as an Alternative to Buying Multiple Rentals
Real estate investment trusts (REITs) are corporations that own or finance investment properties. REITs pay 90% of their annual profits in dividends to their investors and have a low tax rate. Profits typically come from rental income, interest income, or both. REITs can be either publicly traded or privately held. REITs give you greater liquidity than owning physical property, and like crowdfunding, have a very low-risk investment threshold.
Summary
Buying multiple rental properties is a lot of work. By using cash flow projections to set personal and financial goals, stabilizing your rental properties, and becoming knowledgeable about which types of investment property financing are accessible for you, you can build a real estate empire or manage a small portfolio of properties.
Key Points to Remember:
- To buy a second property, you’ll repeat the same process for buying your first rental property. The only differences are you’ll need to stabilize the rental property and secure different financing.
- Stabilizing rental property involves filling vacancies, lowering tenant turnover, collecting market rents, and minimizing capital improvements.
- Juggling multiple rental properties requires systems for managing your investments that include hedging against liability and working with a team of professionals.
- The BRRR method means to buy, renovate, rent, refinance, and repeat.
- Portfolio loans are used by investors who don’t qualify for traditional financing due to owning too many rental properties or having low credit scores, which makes them a great option for investors who have already acquired several properties.
- Buying and financing multiple rental properties begins with understanding investment property financing and how to manage multiple investment properties.
