Good things come in twos, threes, and, sometimes, even fours—especially when building your investment property portfolio. The benefits of having numerous rental properties are extensive—from increased revenue streams to long-term returns. However, high taxes, strict requirements, and ongoing property management can quickly interfere with your growing investments. While expanding your investment portfolio is exciting, landlords should consider the benefits and the drawbacks beforehand. Before buying multiple rental properties, consider these five things to know about buying multiple rental properties:
- The property’s potential
- Your debt-to-income ratio
- Your cash reserves
- Your financing options
- Property management
The Property’s Potential
Contrary to popular belief, landlords can make money through their investment properties before they buy them. This is achievable by researching the market and purchasing property below its market value. As exciting as investing is, landlords should never rush to buy a house. Instead, thoroughly scout your preferred neighborhood for the best deal. Compare properties’ potential based on:
- The location – The home’s surrounding area is one of the most important factors when purchasing an investment property. Before buying, research the area for local attractions, amenities, and other features that may draw tenants to your rental. Securing a thriving location—or a location with a lot of potential—may guarantee you’ll see a great return on your investment.
- The price – Like a diamond in the rough, some sellers offer their houses well below value. By scouring the market for the best financial deal, landlords can make money by saving money at the forefront of their investment journey.
- Repairs needed – Home renovations can be tricky to navigate. While one house’s repairs may be a quick flip, others may spiral into a money pit. From broken dishwashers to new roofs, investment properties can require various updates. Before adding a property to your portfolio, ensure you can assume financial responsibility for all remodeling, repair, or maintenance.
- The demand – Investment properties are worthless without renters. Before buying, research comparable properties to calculate the average rate for rent. Then, evaluate whether you can responsibly charge the same rent. Will the current rent rate cover your mortgage? Are there any features on the property that may entice renters to spend more? If demand decreases, can you afford the mortgage alone? Consider both scenarios: your property at full capacity and with many vacancies. Then, access if your finances can carry the weight of both possibilities.
- Their forecasted potential – Look to the future to hypothesize future trends in demand. Will any big businesses move to the area and attract new employees? Is there a university nearby with a steady demand for student housing? Forecasting your investment’s earning potential is a crucial step to take before investing.
Saving money in the beginning makes it easier to enjoy your return in the future. From searching for a home below market value to gauging its repair costs, evaluating your property’s potential before you purchase is essential. Regarding investment properties, saving money is equivalent to making money. The only way to achieve this is to plan.
Your Debt-to-Income Ratio
Affordability should always come first. After researching the comparable rental properties in the area, evaluate your current finances and financial responsibilities. These can include existing debts, mortgages, and miscellaneous expenses you pay monthly. Although they seem like separate responsibilities, investment property expenses can quickly compound your previous financial obligations. When buying multiple rental properties, the most crucial thing to consider is whether your finances can shoulder the added expense.
Next, compare your mortgage rate against the rent you intend to charge tenants. Calculate how your potential income can affect your ability to pay your mortgage, tackle interest rates, and make an income. To calculate the debt-to-income ratio, add all your monthly bills together, then divide this number by your gross monthly income. After calculating your debt-to-income ratio, estimate the income needed to make a profit. Then, hypothesize whether you can charge that amount compared to the area’s competing rentals.
Finally, estimate your ability to afford the property and responsibly pay your current debts throughout all circumstances. The market can be unpredictable, and although some areas are more likely to maintain demand than others, the threat of vacancy is ever-present, no matter the location. To ensure you sustain a manageable debt-to-income ratio after purchase, calculate how the rise or fall of your income could affect your current and future financial obligations.
Pro Tip: Mortgage lenders also use your debt-to-income ratio to determine whether to lend to investors. The ideal debt-to-income ratio falls lower than 36%. Lenders generally will not lend to borrowers with a ratio higher than 43%.
Your Cash Reserves
Cash is king, and you’ll need to save a large amount of it before managing multiple properties. Financers require down payment deposits upwards of 20% for each property purchased. As the number of rental properties you own increases, so does the required down payment deposit. Next, lenders require landlords to maintain a minimum six-month cash reserve of mortgage payments. Lastly, since the risk of payment default increases with rental properties, investment property mortgages often boast high interest rates. These figures can add up quickly, yet banks will not lend to investors without the necessary funds. Thus, when pondering how to buy multiple properties, remember each property requires a large down payment, an extensive cash reserve, and comes with high interest rates.
Pro tip: In addition to the required cash reserve, landlords should reserve money for unforeseen circumstances—such as sudden repairs or vacancies. Before investing, ensure you have the funds necessary to withstand unexpected expenses.
Your Financing Options
After saving your cash reserves, consider the options to finance your potential investments. Your investment must qualify as a rental property to receive funding. Lenders consider rental properties:
- Houses
- Condominiums
- Single-family units
- Multifamily units
Once you select a qualifying property, evaluate your credit score. Since managing multiple properties is a financial risk, lenders use your credit score to assure you are a responsible borrower. Thus, you must possess a credit score above 720 to receive adequate funding. If your credit score is below 720, your financing options will be limited, and you may face poorer rates.
If you do have a credit score more than 720, you can finance your rental property in the following ways:
- Conventional loans – come directly from institutions that federal agencies don’t back. They follow Fannie Mae and Freddie Mac’ guidelines and are slightly more challenging to obtain.
- 203K loans – also known as “fixer-upper loans,” are offered when properties need significant repair. In addition to the down payment and credit score requirements, investors must have a detailed plan for remodeling to qualify.
- Portfolio loans – are typically kept in-house by small financial institutions, such as private banks or credit unions. Instead of selling mortgages to other companies such as Fannie Mae or Freddie Mac, small institutions keep the mortgages they lend within their range of investments. Because of this, their risk is higher, their requirements differ from standard lenders, and their standards for approval vary on a case-by-case basis. Investors may elect portfolio loans if they do not meet conventional lender standards, such as having a high credit score.
- Blanket loans – are single, substantial loans that cover the mortgages for multiple properties. Investors use these to buy numerous properties at the same time. These loans tend to charge higher interest rates and poorer terms for investors because of the risks involved.
- 1031 exchanges – Investors can employ a 1031 exchange to “swap” rental properties. If both properties serve the same purpose, they can use the sale of one to buy another. With a 1031 exchange, investors defer any capital gains charges on the old property.
Landlord investors have a myriad of financing options. However, they generally must maintain a credit score of at least 720 and a clean credit history to enjoy the range of options.
Property Management
In addition to weighing the financial aspects of your investments, contemplate your capacity to manage multiple properties. Managing rentals takes time and dedication. Landlords must attend to each property’s maintenance needs, tenant requests/complaints, and financial responsibilities. While each duty may seem manageable individually, these tasks can compound quickly. To ensure you’re managing your property effectively:
- Screen your tenants – Tenants are vital to keeping your property in excellent condition. Screen tenants for their criminal, credit, and rental background, and request recommendations from previous landlords to ensure your tenant will take care of your property.
- Upkeep all landscaping, maintenance, and repair needs – Do this regularly to certify all systems function correctly and your rental provides an enjoyable environment for tenants to live in.
- Remain organized – Managing multiple properties means managing numerous tenants. To keep track of your expenses and responsibilities, consider using a rent roll , write rent receipts, and maintain a record of all maintenance/repair needs.
- Communicate with your tenants – Address all tenant concerns promptly and professionally. Remaining attentive to your tenant and their needs helps ensure a good landlord-tenant relationship and positive tenant retention.
Before investing in multiple rental properties, ensure you can effectively balance the needs of your budget, the property’s maintenance, and your tenants.
List Your Properties with Apartments.com
Buying multiple rental properties is a significant endeavor, but Apartments.com can aid you every step of the way. Use Apartments.com to scout the location and price of comparable rentals in your desired area. Once you purchase the properties and set an expected rent, use Apartments.com to advertise and manage your rentals like a pro. When you list your rental on Apartments.com, we provide you with free rent comparison reports. This valuable information gives you a clear understanding of the market so you can price your rental right, compare your property’s value to other similar properties, and review market conditions like the average days on the market and the average rent rates. By listing on Apartments.com, you can reach millions of renters and fill your vacancy fast.
Frequently Asked Questions
Is it worth owning multiple properties?
Owning multiple properties can provide a great source of income to landlord investors. To keep a healthy income, ensure to balance all properties’ maintenance, tenant requests, and financial responsibilities.
How do you buy multiple properties at once?
If you fulfill the credit score and down payment requirements, purchasing multiple properties at once is relatively easy. Decide which type of loan you would like to employ, and speak to a lender about your financing options
How many investment properties can I buy at once?
You can buy multiple investment properties at once if you qualify for your financer’s credit score and down payment requirements.
