Owning multiple rental properties can be a good way to generate income streams and build wealth over the long term. But as you grow a real estate portfolio, multiple properties can sometimes be difficult to finance… Unless you know where to look.
In this article we’ll explain why owning rental properties may be an attractive investment, and where to find loans for more than one home.
Benefits of Owning Multiple Rental Properties
If you own stocks, the odds are that you own more than one. Your portfolio probably has a mixture of value and growth stocks, and maybe the occasional IPO. To paraphrase a well known saying, you don’t want to put all of your eggs in one stock.
Investing in real estate works in a similar way. While everyone’s investment strategy and long term goals are different, here are some of the potential benefits of owning more than one rental property:
Multiple Income Streams
One of the main reasons for investing in rental property is for the income stream generated after the rent has been collected and the bills have been paid.
However, rental income isn’t always consistent from one month to the next. It could take longer than expected to find a qualified tenant or expenses could be higher than expected due to having to make a major repair.
Having multiple income streams from several rental properties can help to offset the short-term negative cash flow from one home with the positive cash flows from the others. Plus, by owning more than one rental property, you also have the potential to generate a larger amount of net income each month.
Diversifying your real estate portfolio by geographic location is one way to help minimize risk. Back in 2015, Realtor.com listed Denver, San Francisco, San Jose, and Boston as among the 20 hottest real estate markets. Fast forward to today, and Realtor.com’s top real estate markets include Coeur d’Alene in Idaho, Austin, Billings, and Springfield, Ohio.
People are moving to cities where the cost of living is more affordable. That doesn’t mean that large urban areas are necessarily bad for investing. But changing trends do illustrate that owning rental properties all in one city may not be the best investment strategy.
Increased Tax Benefits
Tax law in the U.S. is friendly to real estate investors. It’s hard to find another asset class that offers tax write offs like deducting operating expenses, owner business expenses, and depreciation all together.
Of all the tax benefits that come with owning multiple rental properties, depreciation just might be the biggest. According to IRS Publication 946, How to Depreciate Property, residential real estate used for investment purposes depreciates or wears out over 27.5 years. That means if you own a rental property worth $150,000 (excluding the land) you could deduct $5,455 each year to reduce your taxable net income.
The more rental property you own, the bigger your depreciation expense deductions could be. Eventually, you might even find yourself in a lower state and federal income tax bracket.
Keeping track of depreciation rental property can be complicated. That’s why many rental property owners use Stessa to track income, expenses, and generate monthly and year-end financial statements for free.
Financing Options for Multiple Rental Properties
Financing your first couple of rental properties can be relatively easy, but as you grow your real estate portfolio, investment property loans can be harder to find. That doesn’t mean it’s impossible, but it does mean that you need to think outside of the box.
Here are some ways to finance anywhere from one to dozens of rental homes:
4 Properties or Less
Investors with a good credit rating can generally finance up to four rental properties using conventional financing from a traditional bank or credit union that offers:
- Loan terms of 30 years
- Low interest rate
- A down payment requirement of 20% or more of the property value.
5 to 10 Properties
The Freddie Mac Investment Property Mortgages program allows qualified real estate investors to finance up to 10 properties, with the following requirements:
- Borrowers with seven or more financed properties must have a minimum credit score of 720
- Maximum debt to income ratio of 45%
- Maximum of 10 1 – 4 unit properties
- Down payments ranging from 15% to 25% depending on the number of properties
- Six months of cash reserves required for each property
- Borrowers can’t be related to the builder, developers, or seller
10 Properties or More
Blanket loans and portfolio mortgages may be a good options for investors looking for financing for 10 or more rental properties:
- Offered by private lenders rather than traditional banks and credit unions.
- Blanket loans are a single mortgage used to finance multiple rental properties.
- Portfolio mortgages are individual loans to a borrower held by the same lender as a mortgage portfolio.
- Loan terms such as down payment, interest rate, amortization, and balloon payment can be customized to meet the needs of the borrower and lender.
- Fees and interest rates are generally higher compared to conventional financing.
- Lenders may require cross collateralization of other borrower assets (such as a personal residence) in addition to the property being financed.
Options for Creative Financing
In addition to using a conventional loan or a private mortgage, you may be able to use assets you already own to obtain loans on multiple rental properties:
- Cash-out refinancing frees up the accrued equity in your current property to use as down payments for additional rentals.
- Home equity line of credit (HELOC) lets you tap into the equity in your home when and if you need cash for a new rental property, similar to the way a credit card works.
- Self-directed IRA lets you invest in rental property within your retirement account.
- 401(k) for small business owners provides checkbook control to direct where to invest.
As you research financing options for rental property, be sure to visit the Stessa Mortgage Center to learn more about purchasing or refinancing an investment property.
How to Analyze Investment Property
Investing in multiple rental properties can be a good way to increase cash flow and diversify investment risk. Here are some tips on analyzing potential investment property as you scale up and grow your real estate portfolio:
Where to Find Rental Property
- Roofstock Marketplace is used by remote real estate investors to buy and sell single-family rentals, multifamily buildings, large portfolios of rental property and, through Roofstock One, accredited investors can purchase shares of an individual rental home.
- Zillow, Realtor.com, and HomePath.com are three online websites for finding homes for sale by owner, real estate agent listings, and homes in foreclosure.
- Multi-Listing Services (MLS) are used by investor friendly real estate agents to locate active and expired listings that could make good rental property investments.
How to Analyze an Investment Property
There are a variety of financial metrics that real estate investors use to analyze the potential performance of a rental property:
Gross Rent Multiplier (GRM)
Estimates the potential profitability of similar rental properties in the same market by dividing the property price by the gross rental income.
In general, the lower the GRM, the better the investment may be because there is more rental income generated relative to the purchase price. If a home costs $100,000 and the gross annual rent is $12,000, the GRM is 8.3 ($100,000 Property Value / $12,000 Gross Rental Income).
Amount of pre-tax money left over after the rent has been collected and all of the bills have been paid. If a property generates $12,000 in annual gross rental income and the operating expenses and mortgage are $9,500, the yearly cash flow is $2,500.
Net Operating Income (NOI)
Net income is equal to cash flow minus the mortgage payment and is used to calculate cap rate. In the above example, if the yearly cash flow is $2,500 and the annual mortgage payment (principle and interest) is $3,500, the NOI is $6,000.
Used to estimate the expected rate of return from similar rental properties in the same market by comparing the NOI to the property value. If a home is worth $100,000 and the NOI is $6,000, the cap rate is 6% ($6,000 NOI / $100,000 Property Value).
Cash on Cash Return
Compares the annual pre-tax cash flow from a rental property to the total cash invested. If a home is purchased with a $25,000 down payment and the annual cash flow is $2,500, the cash on cash return is 10% ($2,500 Pre-Tax Cash Flow / $25,000 Total Cash Invested).
A Simple Tool for Analyzing Single-Family Rentals
This simple spreadsheet by Roofstock provides an easy way to view the potential financial performance of a given property. You can use it to forecast the potential return of a property. Simply enter some information to view projected key return on investment (ROI) metrics, including cash flow, cash-on-cash return, net operating income, and cap rate.
Using an LLC for Group Investing
Instead of owning and financing multiple properties on their own, some investors form a limited liability company (LLC) for group investing. An LLC may have multiple members or investors, one of whom oversees the day to day operations of the investment (often with a property manager).
Depending on how the operating agreement is written, profits and losses from an LLC can pass through to each member on a pro rata share based on the amount of money invested, or can vary depending on how active or passive each member is. For example, the active member may receive a larger share of the profits as compensation for spending more time finding the deal and managing the investment.
By contributing capital to an LLC, investors may be able to purchase more rental property as a group than they could individually.
Other Options for Owning Multiple Rental Properties
Purchasing a rental property portfolio, investing in a REIT, putting money into a crowd fund, and buying shares of an individual rental home are other ways to receive income from real estate:
Rental Property Portfolios
Roofstock Portfolios are a good way to buy multiple rental properties simultaneously. Many of the homes may be already rented to tenants and generating cash flow and may have certain due diligence performed, such as property inspections or preliminary title reports.
Real estate investment trusts (REITs) own and operate income producing real estate. REITs often invest in a variety of real estate asset classes, including office, retail, mixed use property, single-family and multifamily homes, and special use property such as data centers.
Crowdfunding sites such as Fundrise and CrowdStreet offer the ability to invest in a wide variety of real estate with as little as $500. Investment opportunities available through real estate crowdfunds include industrial, apartments, single-family rental neighborhoods, and commercial renovations.
Individual Home Shares
Roofstock One offers accredited investors rental home investments for as low as $5,000. You can own shares of an individual rental home, earn passive income while having someone else manage the property, and easily diversify across multiple homes and locations.
Owning income-producing real estate can be a good way to diversify an investment portfolio. Many investors find that once they own one rental home, they’re interested in owning more.
As a real estate portfolio grows, financing multiple rental properties can be difficult unless you know where to look. Conventional mortgages, blanket and portfolio loans, and even using a retirement account can all be good ways to finance more than one rental property.