How many deals can I do?

Question

I have searched the forums and have not found an answer to something that is bugging me and I am curious about something that I keep getting warned about...

Situation / Context:

I currently own 12 rentals (& lease options) with another under contract and a fix & flip under contract as well.  I am fully set up and prepared to start buying a house a month to either, flip, rent or do an lease option.  I am buying the houses for cash, doing any necessary repairs on them, then doing a cash out finance with a lender prior to renting or lease optioning.  I am working with a lender thought the whole process on flips.

Problem:

I keep getting warned by others that I am going to run into some sort of saturation point with my lender and they are eventually going to tell me that I own too many houses and they cannot do any more.  I have asked my lender about this more than once, and he keeps telling me that this won't happen as long as it is a good deal, they will be on board.  Due to the overwhelming advice from others and from books I have read, I tend to think my lender is ... well, I don't think he is lying, but ... I think he is not telling me the whole truth.

Question:

1. Will I definitively hit this wall?

2. If so, what can I do now to start planning in advance a way around this?

3. Any other advice pertaining to this would be much appreciated.

Thank you in advance...

Corby Goade · Answer

You might need to learn more about how your lender is backing these loans. If they are using Freddie/Fannie backed lending, they do cap at 10 loans. If your lender keeps those notes in house (portfolio lending), they can do as many as they want.

If they are portfolio lending, there are a couple items that can convince them to stop lending to you. One is your reserves- almost every lender will require that you have reserves that will allow you to "float" for a few months if every property you have is simultaneously vacant.

The other is your DTI. Because most lenders will not credit you for 100% of your gross rents as income, the expect 25% of it to go in to escrow for vacancy, capex, maintenance, etc, over time your DTI will shrink and your margins will narrow, at least on paper, which makes it tougher and tougher to get lending. You can mitigate this by paying off rentals as you go. For instance, since the bank only gives you 25% credit for your gross rents, maybe you structure your acquisitions so that you are able to pay off a rental for every four properties that you buy, which comes out to 25%. That would level out your DTI over time and keep you from stalling.

Good luck!

Karen O. · Answer

A local bank may be holding your loans in their portfolio so the cap on # of loans they'll float you is higher than if you had a fed backed loan.

FHA will allow one or two loans depending on circumstances.  FNMA will allow up to 10.  But a private local bank that doesn't recapitalize by selling their loans to FNMA may allow more.

Heath Ryans · Answer

@Ben Lilley what i think they are referring to is the cap on the number of residential loans a bank will give an individual. While i believe it is significantly less than what you have now, there is a number that banks normally wont surpass. I can't remember what that number is exactly, i'm thinking it's between 5-7.

I'm not to that point yet so i don't have a real answer for you, however, i do recall a podcast that mentioned rolling them into one big portfolio loan, essentially resetting your number of residential mortgages to 0. I assume you could also just move them under an LLC and it would be fine but i don't know that for a fact.

Ryan G. · Answer

It depends on your lender. Suntrust told me they would only allow me to hold 4 mortgage loans at once. The lender I went with instead told me they would limit my number of mortgages to 10(though, they immediately sell the loan to another company).

Brad Smith · Answer

Hi Ben--

While it's theoretically possible to reach your maximum with any source, even the ones that advertise no limit, it mostly depends on the house in question and your financial profile.  For loans that I can fund, property values of 100K and up, credit score of 660 or higher and DSCR of 1.3 and higher can go into to mid double-digits of units before requiring consolidation.

Placing properties in a portfolio has its drawbacks, but also provides a lot of leverage to purchase more units.

Hope this helps!

Adam Hughes · Answer

@Ben Lilley

While I respect what others are saying here, there is no actual “cap” standard or regulation. Banks may set their individual cap to mitigate risk of their portfolio to one individual. Does your lender work directly for a bank or is your lender a broker? I work with a broker and he will do my kind all day, then sell them to BoA, Wells, etc. and off to the next one. If he works for a small bank then at some point the loan committee may step in and say enough is enough and if he/she works for a large bank there likely is a cap on the amount they will hold. That said they too could sell a portion of your loans.

One piece of advise I’d give you is diversify your connections. Go find another lender and give them a try on the next one until you find at least a second lender you like working with.

Hope that is helpful.

Kenneth Garrett · Answer

@Ben Lilley

Eventually you will run into a limit.  Whether it is a max on residential loans (10) or commercial loans, there is going to be a time when you will cap out.  I typically take out commercial loans on my refi’s and although the approval is based on Cashflow, I still have to personally guarantee the loan.  The solution is to work with multiple banks.  I have one lender where our future loans require approval from a committee.  At this point I am working with 4 different lenders.  One lender does not seem to impact another.

Good Luck.

How many deals can I do?

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