I heard that one can only buy up to 4 homes with financing, is this true?

Question

I have one owner occupied home and one rental home. I intend to buy and invest in more rental properties, but I heard that a person can get financing for only up to 4 homes. First of all, is this true? I was also told that there are exceptions to this rule but I don't have  any idea of what these exceptions are. So second question is if the 4 home rule is true, how to work around it.
My thinking is if I cannot go over more than 4 homes anyway, I would invest for two more medium priced homes ( 200K - 350K in the CA bay area) otherwise I will go for sacramento or las vegas where I can buy lot more homes ( with lot more cash positiveness) for the same total amount

Jon Holdman · Answer

No, its not true.  However, like many myths, there's an element of truth.

"Conventional loans" aka "conforming loans" are ones that conform to Fannie Mae and Freddie Mac rules.  These are the rules dictated by FM & FM for loans they will buy.  Many "lenders" actually (still) turn around and sell the loans they originate to one of these two organizations.  So, these rules become a pretty strong benchmark.

They have one set of rules for the first four mortgaged properties, then another set for properties 5-10.  The first set says you need to have 25% down, good income (< about 50% DTI, I've heard), and six months PITIA (A = anything else such as HOAs) for the property you're buying or refinancing and two months for any others.  For 5-10, you need 30% down and six months PITIA for all properties.  Once you have ten mortgaged properties, you no longer qualify for conventional loans.

Some banks are more restrictive and will only do those first four, which is where this "only buy four" properties myth originates.

Even after ten, there are ways to buy. Some banks and credit unions keep their loans.  These are "portfolio loans" because the lender keeps them in their own portfolio.  These loans fall into the general category of "commercial loans".  You may have to call 20 banks and credit unions, but these lenders do exist.  Rates might be a bit higher, and terms are almost certainly shorter.  15-20 years max.  The 30 year fixed loan is strictly a conventional product.  Balloons, especially with rates very low right now, are common on commercial loans.

Then there are always strategies like owner carry, subject to, and lease options to acquire more properties.

Conventional lenders will also want to see the rental properties on your tax return.  I've heard that there are lenders who will count rental income without two years of tax returns, but the FM&FM rules are two years.  Generally lenders consider (75% * rent) - PITI to calculate the actual cash flow.  Personally, I consider that to be a little optimistic.  I'd consider 50% of rent, less P&I to be a better estimate, if you're using a property manager.  Self-managing will generate more returns, but at the cost of dealing with tenants yourself.

Of course, being cash flow negative isn't necessarily bad.  If you can sustain the monthly loss and expect some appreciation you may work out well in the long term.  If nothing else, its a forced savings plan.

Jon Holdman · Answer

Current Freddie Mac LTV guidelines.  Looks like its actually possible to go up to 85% of purchase for SFR investment properties.  Didn't find the full set of guidelines, but they're on they're site, somewhere.

Also handy is the FDIC institution directory.  Try searching for smaller (whatever that means in your area), local (just a small number of branches in your area) banks that specialize in real estate.  They are out there.  Banks are lending if you're well qualified.

Curt Davis · Answer

1-4 mortgages 75% on refi and 80% on purchase.  5-10 homes 70% on refi and 75% on purchase with 6 months reserves per property.

Arthur Garcia · Answer

Another topic to throw in the mix that is related is the borrower's credit score. On properties 1-4, I believe you need to have a score of 620 or higher. However on properties 5-10, you need to have a score of 720 or better.  You will also have to provide tax returns that show 2 years of profitability on your rentals to count cashflow as part of your monthly income.

I hope this also helps you ask you forecast the timeline of your acquisitions.

Jon Holdman · Answer

If I was paying $4000 on a property that was only renting for $2700, I'd seriously think about selling it.  Unless you're expecting something big in the future (e.g., appreciation or something that will make it much more valuable), its a serious loser as a rental.

For your third and fourth property, you will need to show $8000 in reserves to cover this property.  After that, you'll need to show $24,000 for this property.  The rent does not affect reserve requirements.  Note that 401k's, IRA's and other retirement accounts can be used, but there is a discount factor applied to account for the taxes and penalties you would incur if you were forced to liquidate them.

When computing your DTI ratio, the lender will take the rent * 0.75.  In your case, that's $2025.  Then they subtract the PITI, $4000.  That results in negative net rental income of $1975.  You will need to cover that $1975 with other income.  However, since you've had this on several tax returns, they may just want to see your schedule E from your return to see the actual income.  So that number may be different than the $1975 loss.  I'm not 100% clear on exactly how this is used when calculating DTI.  I believe it is:

(all existing debts - PITI on the existing rental + PITI on the new rental) / ( all ordinary income + net rental income from existing rental + net rental income from new rental)

Note that in your case the "net rental income from existing rental" is -$1975, so this hurts your ratio.  "All existing debts" does include PITI on the existing rental, which is then subtracted back off.

Say:
All existing debt: $7000 ($4000 on existing rental, $2000 on primary, $1000 car payment and credit cards)
New rental PITI: $1000
Ordinary income: $10,000
Net rental income from new rental: $200 (rent of $1600 * 0.75 less $1000 PITI)

So, DTI = ($7000 - $4000 + $1000) / ($10,000 - $1975 + $200)
= $4000 / $8225 
= 47%

Take that with a grain of salt.  I'm not certain that's how lenders actually do that calculation.

Kyle K. · Answer

That's exactly what my lender told me, and he's the man.

Bill Gulley · Answer

Great thread.....FM&FM have basic underwriting guidelines but there are also exceptions that may be applied in geographic areas. Cali will have some differences from my area as underwriting also reflects the differences in markets. So you can have a 70% refi in one area and 75% in another. And as Jon mentioned, the lender may be more conservative. When you get in the wholesale mortgage market you'll find underwritters are broken down by state or several states in a geo are where the markets, prices and economic factors are considered that each underwriter might consider and apply some really stark differences to another area or to the gray areas. It is not consistant throughout the country.

Darryl Dahlen · Answer

For those of you who own a lot of properties and are having trouble finding a residential lender who can help with ongoing financing you may want to look into New Penn Financial.

I know some residential LOs who use NPF for clients who are investors and still need financing and say they're good to work with.

That said, I am not affiliated with NPF nor have I ever used them.

http://www.newpennfinancial.com/buying-a-home/real-estate-investors

Nathan Emmert · Answer

The 1 - 4 and 5 - 10 rules are for numbers of Fannie/Freddie properties.  If the 1st 4 houses you buy are all portfolio leant, and your 5th house you want to go conventional, it's the same as #1 conventional.

Most simply start with conventional as it's the cheapest money.  After those bullets are exhausted they get more creative or settle for more expensive money.

Joe Smith · Answer

Arthur, I've got you there, what I mean is, if I HAVE 4 commercial loans, and apply for a CONVENTIONAL loan to buy myself a new house, does the conventional U/W count those COMMERCIAL loans towards the 4, if they've been guaranteed by me?

I heard that one can only buy up to 4 homes with financing, is this true?

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