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How to Finance Multiple Rental Properties to Grow Your Portfolio

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Multiple Rental Properties

If you’re looking to grow your rental property portfolio, this rental property guide is an excellent place to start. It can help you decide whether or not rental properties are suitable for you, and if they are — the best way to go about it.  And, besides rental property investing strategies, one of the main ways you can get properties is through financing. Here’s more on how to finance rental property to grow your portfolio.

Real Estate Coaching 101 – How to Finance Multiple Properties

If you already have rental property, there are typically two options for financing another rental property: taking out a new loan or refinancing an existing mortgage.

According to rental property investing strategies, the best option typically depends on two factors: 

To choose the best option, you have to consider the following factors: how much you can afford and how quickly you need to access the money. 

If you want your property right away, you could refinance the property and take less time applying for a new loan. 

On the other hand, If you already have the property, you could hold on to getting a new one. This will lead you to more time to pay the bills and get a better loan. However, let’s assume the property you acquire needs a lot of investing before you can rent it out. Taking into account the two main factors previously mentioned, is either of these options for financing the second property viable? 

1) How much you can afford 

2) How quickly do you need access to the money? 

Refinancing may be a better choice if you want the rental property right away since it usually takes less time than applying for a new loan. On the other hand, if you already have a rental property and can afford to wait for your next rental property and still pay the bills, getting a new loan may be better. Getting an opm for real estate is one of the best things to invest in real estate. 

Let’s assume that the rental property needs some work, and it will cost approximately $40,000 in renovations before you can rent it out.

  •  Is either of these options for financing rental #2 viable?
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Option 1 – New Loan for The Second Property

You can get a new loan, but you will have to pay closing costs on the loan.  Also, if rental property #1 has rental income, then rental property #2 will not be considered owner-occupied since two rental properties are already owned. For that reason, most people would find it difficult to qualify for another new loan.

Option 2 – Refinance Existing Mortgage on the First Property

Suppose the first property is financed with an existing bank or mortgage company (i.e., carries a current balance). In that case, one option is to refinance the first property and use the proceeds from refinancing the first property to make improvements on the second rental property and finance the second property by taking out a new note against it. Assuming the first property is worth $100,000, rental income of $1250/month (net rental income after expenses is $1025/month). An outstanding loan balance on the first property of $80,000, refinancing the first property will be possible if the person’s credit score is above 700 or 680 with a 10% down payment.

One important point to remember with refinancing the first property #1 for improving the second property is that the person financing rental properties must be living in the first property as their primary residence. This means they can not leave it vacant while awaiting closing on the second one. Another option is to rent the first property out while the renovation of the second is being completed. This will require finding a new tenant for the first property and adding another rental property management expense but would allow the person financing rental properties more time to complete their renovation on the second property before moving into it.

How to Finance The Third Rental Property

If you have owned rental properties for some time, people use cash from current income generated by rental properties as a down payment on acquiring another rental property.  In this case, if rental properties generate positive cash flow every month from rents after expenses, then 5% or 10% of that amount can be used to buy another rental unit.  For example, the first property is worth $100,000 with a rental income of $1250/month (net rental income after expenses is $1025/month). The second property is worth $80,000 with a rental income of $1000/month (net rental income after expenses is $900/month). The person financing rental properties can use 5% or 10% of net rental income to finance another rental property.  In this example, that would mean using about $500 or 1000 per month towards the down payment on another rental property.

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Who Provides Financing for The Third Property?

You will likely need to get approval from the existing lender of the first property before closing on the third property.  Suppose the first property is financed with a current bank or mortgage company (i.e., carries an existing balance). In that case, it’s best if you refinance the first property and use the proceeds from refinancing the first property plus your cash flow between rental properties towards making improvements on the third property and finance it by taking out a new note against the third property.

Another option is to wait until the rental income of both rental properties covers the costs associated with paying for the financing of rental properties. For example, if the purchase price of the third property is $120,000 and rental income of the first and second properties are both enough to cover monthly expenses (including financing the third property, then the person financing rental properties can use available cash flow to make improvements on the last property.  In this example, it would take about five years for rental income from the second and first rental properties combined to pay off the purchase price of the last one.

Common Issues On Renting Multiple Properties

What if I don’t have enough credit score or cash to buy my first rental property? Suppose you don’t have enough credit score or money to buy your first rental property with an existing lender. In that case, private lenders will allow you to finance rental properties using your first rental property as a down payment.  In other words, the person funding the properties does not need excellent credit for this type of transaction and does not have to come up with 20% or more for a down payment on the first property if they want to acquire the second property within five years of closing on the first one.

What is Private Money Financing?

Private money financing refers to a third party that lends money towards improving the third property without having the legal rights associated with being a tenant. They will also lend money against existing rental income from the first and the second properties.

In today’s real estate market, rental properties are a great way to grow your rental portfolio. But sometimes, people get tripped up when it comes to financing multiple rental properties. This real estate coaching guide shows you how to acquire and manage several properties with an array of options.

 

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