How Many Mortgages Can You Have? Investor Strategies

You can build long term wealth in real estate investing with just one property that you hold for years. However, what if you want to grow faster than that? What if you want to retire early with real estate or make extra monthly passive income? How many mortgages can you have?

Spoiler alert: there's no limit on the number of mortgages you can have. The catch? Each type of mortgage comes with its own set of rules and requirements.

This article covers multiple mortgages for real estate investors. We'll explore conventional loans and their limits, alternative financing options like portfolio loans and seller financing, and strategies to maximize your investment potential. We'll also cover the pros and cons of owning multiple properties and provide insights on managing your portfolio.

Multiple mortgages in real estate investing

Using multiple mortgages is a way to grow your investment portfolio, but you should be aware of the pros and cons of this approach.

Pros of multiple mortgages

• Increase your income: the more properties you have, the more rental income you can make. Instead of say, $500/month in cash flow from one property, you might make $2000/month with four properties.
• Boost tax benefits: there are many tax benefits to owning rental properties, like deducting expenses to reduce passive income, depreciation benefit, and the potential for 1031 exchanges to defer capital gains taxes. If you have multiple mortgages, these benefits increase based on volume.
• Diversify your rental properties: if you invest in residential properties like single-family homes or condos, you can spread your real estate assets across multiple neighborhoods and areas.

Cons of multiple mortgages

• Higher debt: you'll have more mortgages, which means you have higher debt payments, so you'll need to manage your properties well to decrease your risk.
• Administrative burden: managing multiple mortgages can be extra work. You'll have to make on-time mortgage payments with each lender. You'll also have to monitor escrow accounts for each and pull 1098 statements for your tax returns each year.
• Reduced borrowing capacity: with each new mortgage, your debt-to-income ratio increases. This can make it harder to qualify for additional loans or refinancing in the future. Lenders may view you as a higher risk, which could limit your ability to continue expanding your real estate portfolio.

Lender requirements for multiple mortgage loans

When you’re ready to buy more properties, lenders will evaluate a few key areas. Here's what they typically look at:

Credit score

Lenders typically require higher credit scores for investment properties compared to primary residences. A strong credit score can help you secure better loan terms and interest rates.

Down payment

Investment property loans usually require larger down payments than do loans for primary residences. The specific amount will vary based on the lender and the number of properties you already own.

Loan to value

This ratio compares the loan amount to the property's value. For investment properties, lenders often require a lower LTV, meaning you'll need to have more equity in the property.

Cash reserves

Lenders often want to see that you have sufficient funds to cover potential vacancies or unexpected expenses. The exact requirements will vary based on the loan type and the number of properties you own.

Types of financing for multiple properties

Investors have several options to finance multiple properties. Each loan or strategy comes with its own set of rules, benefits, and challenges. Let's explore the most common loan types, starting with conventional loans.

Conventional loans

Most new real estate investors use conventional mortgages for their first few rental properties, as the process is fairly straightforward and similar to working with a mortgage lender on a primary residence.

These mortgages fall under two government-sponsored entities: Fannie Mae and Freddie Mac. It means you'll see competitive interest rates, consistent terms across multiple lenders, and 15-30 year fixed loan terms.

Depending on your qualifications, the Federal National Mortgage Association (FNMA) says you can finance up to ten properties with conventional loans. Rules and details include the following:

First 4 properties

You can finance up to four properties with a good credit score of 670 or higher, down payment of at least 20%, stable income, and a low debt-to-income ratio.

Properties 5-10

If you want to go with the conventional loan approach to finance more than four properties you'll find that mortgage lenders use stricter criteria. This includes a credit score higher than 720, down payments of 25%-30% and sufficient cash reserves to cover six months mortgage payments on each property.

Income

Your income must support the total mortgage payments for all financed properties. This includes both personal income and rental income from investments. Traditional lenders only count 75% of investment property income because they assume you'll have vacancies and maintenance costs. To verify rental income, lenders look at the following:

• Lease agreements
• Rent appraisal
• Rent roll for multi-family properties
• Profit and loss statements
• Tax returns showing rental income

Residential loan programs

Residential mortgages are conventional loans that offer lower down payments and interest rates compared to other loan types. However, they come with specific residency requirements. This is particularly true for FHA and VA loan programs, which require you to live in the property as your primary residence.

Many new real estate investors use these loans with a "house-hacking" strategy, which allows them to meet residency requirements while still generating rental income. This involves buying a multi-unit property, living in one unit, and renting out the others.

Blanket loans

Blanket loans allow you to manage multiple properties under a single loan. All of your real estate assets serve as combined collateral for the loan.

Blanket loans typically include a release clause. This allows you to sell individual properties without adjusting the entire loan. You simply pay off the portion related to the property you're selling.

These loans allow you to borrow at higher loan amounts compared to a conventional mortgage loan. To qualify for a blanket loan, mortgage lenders will need detailed financial information for each of your properties.

Portfolio loans

Portfolio lenders provide business loans to expand your investments through your LLC or other business entity structure. Each rental property has an individual loan, but they're all under the same lender, who keeps these loans in-house rather than selling them on the secondary market.

Since all your lending is with the same mortgage broker, you can negotiate terms across the entire portfolio. This often means greater flexibility compared to working with conventional lenders.

Seller financing

This is where the property seller acts as the lender, with the buyer making payments directly to them. Sellers choose this option when they need to sell quickly or want to spread out their capital gains tax over multiple years.

For investors, seller financing is an attractive option. You usually only need to cover the down payment, and you may avoid the strict income ratios and minimum credit score requirements associated with traditional loans.

Cash out refinance

If you have existing investment properties with significant equity, you might be able to use a cash-out refinance strategy to generate funds for buying additional properties outright. This involves refinancing your property for more than you currently owe, with the lender providing the difference in cash. It allows you to leverage your built-up equity to expand your real estate portfolio.

You'll need a loan-to-value ratio of 70-75% after the cash-out for lender approval. Keep in mind that this strategy can be challenging if current interest rates are higher than your existing rates since the higher monthly payments will affect your cash flow and return on investment calculations. 

Hard money loans

This is one alternative loan financing programs that you should use sparingly. Hard money lenders base their approval primarily on the rental property's value rather than your personal credit score or income.

The main reason to be careful with this approach is the high interest rates associated with hard money loans. If you use this strategy, make sure you can charge enough rent to cover your loan payments and still have enough money left over for cash reserves.

Private notes

Private lenders provide funding for real estate projects and earn a return on their investment. These arrangements benefit both parties. Lenders enjoy passive income with higher returns than typical savings accounts or CDs, and investors gain access to capital without going through traditional banks.

Revolving credit

You can leverage revolving credit through options like a home equity line of credit or a business line of credit. The lender provides access to a set amount of funds that you can borrow from as needed, and you only pay interest on the amount you actually use.

As you repay the borrowed amount, it becomes available again for future use. The lender secures the credit line against your real estate assets.

1031 exchange

If you sell any existing investment properties, you can leverage a 1031 exchange to reinvest the proceeds into new properties without immediately paying capital gains taxes. This strategy allows you to use the full amount from your property sale to finance new real estate investments.

Commercial loans

If you want to add properties with five units or more to your real estate portfolio, you'll need to use a commercial loan. These loans differ from conventional mortgage loans in several key ways:

• Funding approval: lenders focus on the property's income potential and cash flow more than your personal income. They look at metrics like the Debt Service Coverage Ratio (DSCR), which should be at least 1.25x.
• Loan terms: commercial loans typically have higher interest rates and shorter terms of 5-10 years, often with a balloon payment at the end.
• Prepayment penalties: these loans often include penalties to protect the bank's expected income. Common clauses include yield maintenance or step-down penalties.

Operating multiple rental properties

To effectively manage your properties and avoid risks like late mortgage payments or other complications, consider using property management applications like Azibo. Here's how real estate investors can leverage this platform to maximize their profits:

Filling vacancies

You can use online rental applications and tenant screening to find and secure reliable tenants. Azibo streamlines this process, reducing how long your properties remain vacant and helping you select tenants with a good rental history and credit score.

Lease agreements

Create and manage legally compliant leases with state-specific customizable templates. This verifies all rental agreements meet state and local legal standards, protecting both you and your tenants.

Tenant management

Simplify collecting rent, handling maintenance requests, and communicating with tenants. Automated rent reminders and online payment options reduce the risk of late payments, and a centralized communication platform helps you respond to tenant maintenance requests.

Accounting and financial management

Keep track of income and expenses, generate financial reports, and simplify tax preparation with integrated accounting and financial management tools. You can easily monitor your cash flow, set budgets, and make sure you’re maximizing your profits.

How many mortgages can you have for rental properties?

There’s no limit to how many mortgages you can have for rental properties. In fact, multiple mortgages can help you grow your real estate portfolio. From conventional loans to alternative financing options, you have several options to expand your investments. Each approach offers its own set of benefits and challenges.

As you build your portfolio, keep an eye on your overall financial picture. Balance the potential for increased income against the risks of higher debt and administration. You can simplify this process by using property management applications to streamline operations and maintain profit.

With careful planning, you can leverage multiple mortgages to reach your real estate investing goals. If you're planning for early retirement or simply want some steady passive income, understanding your financing options is a big step toward success in the real estate market.

How many mortgages can you have? FAQs

Can you have multiple mortgages on the same property?

Yes, you can have multiple mortgages on the same property, but the additional mortgage is subordinate to the first and may come with higher interest rates and stricter terms.

Can you get a second mortgage on an investment property?

Yes, you can get a second mortgage on an investment property, but it typically requires strong credit, sufficient equity in the property, and the ability to meet the lender's criteria.

Can I buy another house if I already have a mortgage?

Yes, you can buy another house if you already have a mortgage, but you'll need to qualify for the second mortgage based on your income, credit score, and debt-to-income ratio.