6 Steps on How to Finance & Buy Multiple Rental Properties
Learning how to finance and buy multiple rental properties doesn’t have to be stressful. The process is the same with investing in a single rental property, from researching the best location to planning how to manage your property effectively. However, buying multiple rental properties requires stabilizing and seasoning your current properties, in-depth knowledge of different property types, knowledge of analyzing local markets, and financial calculations of potential income and expenses.
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If you are considering buying one property, read ourHow to Buy a Multifamily Investment Property in 9 Stepsarticle. This will help you better understand how to invest in multifamily real estate to gain cash flow and build a robust investment portfolio with one real estate transaction.
这里有六个步骤lp you learn how to purchase multiple rental properties:
1. Stabilize & Season Your Current Rental Property
Before learning how to buy and finance multiple rental properties, you must stabilize your current property by collecting market rents, filling vacancies, lowering tenant turnover, and minimizing capital improvements. Most lenders choose a fully stabilized rental property when applying for a home equity loan or line of credit. Before they lend on another rental property, some lenders require a six- to 12-month seasoning period on your first loan.
The seasoning period is the time a property has been owned or has had an active mortgage. While each lender has a different “seasoning period,” most progressive, investor-friendly organizations have a three- to six-month seasoning period as the standard. A 12-month seasoning period is more common for more conservative institutions working with owner-occupied loans. If a property has not been adequately seasoned, banks and lenders frequently won’t permit investors to refinance it.
Significance of Seasoning for Investors With Multiple Properties
The Buy, Rehab, Rent, Refinance, Repeat (BRRRR) strategy of real estate investing focuses on buying properties that require work. Investors then rehab them to raise property value significantly, rent them out to get cash flow, perform a cash-out refinance, and use the proceeds to start the process with a different property all over again. The length of a lender’s seasoning period significantly affects how quickly the “Repeat” can occur.
Because most competitive lenders have a three- to six-month seasoning period, BRRRR investors are frequently limited to recycling their cash twice a year. Comparatively, lenders with a three-month or no seasoning period can recycle the same stack of money four or more times a year. Although interest rates on no-seasoning loans may be a little higher, the increased speed and volume that investors can achieve more than compensates for this cost.
2. Consider a Mix of Property Types
When investing in multiple rental properties, it’s critical to consider the types of properties you want to own,flip, and manage, as well as the amount of positive cash flow you want to generate as a property. This is to understand which property type will bring a steady cash flow, substantial appreciation, tax advantages, and competitive risk-adjusted returns.
Different types of properties to consider:
- Single-family residential
- Apartment complex
- Duplex, triplex, or fourplexmultifamily buildings
- Preforeclosure homes
- Vacation rental property
- Turnkey properties
- Commercial properties
- Land
You can buy one type of property or build a mixed portfolio when deciding which type of property to purchase. However, consider how many properties you want to own and when you want to buy them to maximize the amount of money you can make in real estate. Ideally, you should not purchase more than three to four properties yearly.
3. Find New Rental Property Locations
Once you’ve decided on the types of properties and the number of properties you want to own and manage, you can start looking for property listings on Realtor.com, Zillow, and Trulia. Your real estate agent can also set up a subscription to send notifications directly to your inbox based on your property criteria.
Realtor.com is aNational Association of Realtors(NAR) associate member. Its database contains 99% of all multiple listing services (MLS) listed properties, sourced from approximately 580 regional databases—making it the gold standard for quality listings and easy to search all listed homes in a school district.
Realtor.com also offers a free downloadable mobile app for homebuyers and sellers. The app allows you to search for homes, view pictures and video tours, and compare neighborhood criteria, such as noise levels, and view real-time updates on all listings. Draw a shape on the app map with your fingertip to see only the properties within that geographic shape. Additionally, users can use the app to contact realtors and run financial calculators.
Zillow has the most comprehensive tools for buyers, sellers, landlords, renters, agents, and other real estate professionals. In addition, Zillow has the largest number of property listings, with over 135 million listings.
Zillow obtains listing information from both the MLS and non-MLS sources. For sale by owner (FSBO), non-MLS foreclosures, and auctions are examples of non-MLS sources. Zillow has extensive criteria sorting, links to get prequalified financing, volumes of “how-to” guides about homebuying and selling, and a suite of mobile apps that allow you to research whenever and wherever you want.
Zillow’s mobile app allows users to search for homes and apartments, list their property for sale or rent, tour the home through pictures and videos, connect with agents and lenders, and receive notifications of property for sale updates.
Trulia网站provides a mobile real estate app that allows you to search through millions of residential listings, including rental listings such as apartments and condos. Its search feature includes filters for properties currently for sale and rent and recently sold properties. Aside from this, you can filter your results by property type, home size, or keywords you want for your property.
Trulia网站also allows users to save their searches and favorite real estate listings or share listings with a partner or friend. They can turn on alerts to get notifications when new properties hit the market and enjoy a custom feed of recommended listings. Homebuyers looking for assistance with calculations can use the mortgage tools, like the mortgage calculator.
4. Evaluate Financial Projections of Your Rental Properties
If you’re considering buying and financing multiple rental properties,analyze the rental marketand do not buy an investment property impulsively. Continue reading to learn how to evaluate your rental property.
Rental Property Cash Flow Projections
Cash flow projections help you create a time-bound roadmap, avoid wasteful spending, and determine whether your plan is profitable. When considering how to buy multiple rental properties, consider positive cash flow rather than equity or appreciation, as these fluctuate.
Your projection aims to develop a profitable business, so if expenses consistently exceed revenue, you’ll need to review and evaluate how to increase income or cut costs. You may also need to increase expenditures by advertising vacancies or renovating, repairing, and upgrading, which will command higher rents and greater profitability.
Critical 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. Investors often use three key metrics to evaluate a rental property: capitalization (cap) rate, cash-on-cash return, and return on investment (ROI).
Here are the three key metrics in evaluating rental properties:
Key Metrics |
How It Works |
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It is the expected rate of return on real estate. It uses net operating income; doesn't include mortgage debt. |
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Cash-on-cash return |
The annual rate of return in relation to the amount of financing paid during the same year. |
Profit made on the investment is a percentage of the cost of the investment. |
Using metrics to determine the performance of an investment property can help you avoid costly mistakes and stay on track with the goals you set in your cash flow projections.
If you want tocalculate your rental property’s potential gross annual rental income and vacancy rate, check out ourGross Rent Multiplier (GRM) CalculatorandVacancy Rate Definition, Formula & Averagearticles.
5. Decide How to Finance Multiple Properties & Prepare Paperwork
When learning how to purchase multiple properties, financing needs to be a major consideration. Financing multiple rental properties can be challenging, so getting creative is often necessary if you plan to own more than four investment properties. There are many types ofinvestment property loansyou can use to help you build your rental portfolio. The best financing for your acquisition will depend on your personal financial situation and the financing needed.
Financing Type |
Best For |
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Fast, short-term financing |
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At least 40% equity in a primary residence |
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Conventional Financing |
Credit scores above 660, 20% to 30% down payment, fixed interest rate |
Less stringent credit or fewer property requirements |
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Creative, short-term financing |
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Retirement Account |
Borrowing against retirement funds for a down payment or purchase |
Reinvesting rental property profits into additional properties |
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Buying multiple properties and later refinance or sell |
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Cash-out Refinance |
投资属性与40%到50%的股本 |
The paperwork and documentation you will be required to submit when purchasing multiple rental properties will vary by lender and loan type. However, in most cases, you will be required to submit documents similar to obtaining a loan on a primary residence. Regardless of loan type, you should be prepared to provide the following—in addition to any lender-required forms and applications—upon your lender’s request:
- Personal and business tax returns:At least the two most recent years
- 工资单:At least the three most recent pay periods
- Bank statements:At least the three most recent statements
- Explanation of prior experience:While some lenders are open to first-time investors, most will require that you have prior real estate investment experience.
- Hard money loans:Hard money loansare short-term (typically up to 12 months), interest-only mortgages used by investors to purchase properties. These loans have higher rates of up to 12% but can fund in 15 days.
- Investment property line of credit (LOC):AnLOCis a revolving line of credit collateralized by real estate. The maximum limit for an LOC is based on the amount of equity in the property and typically will not exceed 75% of the property’s value.
- Conventional financing:Conventional financing includes loans that conform to guidelines set byFannie MaeandFreddie Macand are backed by the federal government. For investment property, lenders require a 25% down payment.
- Portfolio loans:Portfolio loansare 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 financingprovides buyers with easier terms than a traditional mortgage while giving sellers monthly income. 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 your 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.
- 1031 Exchange:The federal government created the1031 Exchangetax code to encourage real estate investing. Section 1031(e) 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:Ablanket mortgagec是一个单一的贷款overs 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:如果你资金投资房地产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.
6. Create a Plan on How to Manage Multiple Properties
As you find out how to purchase multiple investment properties, you will need to decide whether you will self-manage the properties or hire aproperty manageror 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. But if you manage multiple properties by yourself, it’s wise to set up a separate限制ed liability company (LLC)and sign up for online rent payment services and property management software.
Rent collection can be a difficult task for independent landlords. As a result, usingonline rent collection software, such as Baselane, simplifies tenant rent payments, making it easier for landlords to collect money and manage their rental properties. Online rent payment services are an excellent resource for busy landlords because they offer various tools, from maintenance requests to online rent payments, to fit multiple landlord management styles and tenant needs.
Moreover, whether you or someone else manages your rentals, you’ll need to handle the finances, maintenance, and tenants. Management companies orproperty management software, can help in managing tenant-related issues,tenant screening, property maintenance, banking and finances, escrow deposits, and paying bills, and provide an additional layer of liability protection.
In addition to liability insurance and the management LLC, separating each property into its legal entity is a good idea to mitigate liability further. LLC is commonly used, but some owners put their properties in the names of real estate trusts or their spouses. Consult your attorney and accountant to determine which entities are best for you.
Bottom Line
Do not make rash decisions about buying and financing multiple rental properties without carefully assessing factors such as the house’s condition and potential ROI. The steps and tips outlined above serve as a guide the next time you consider investing in multiple rental properties. Be thorough and strategic in every step to achieve your desired result and become successful in investing in multiple rental properties.