At what point will the banks cut you off?

[Greg White]

I know one of the strategies I hear frequently on the BP podcasts is to purchase a single family home investment property, fix it up to increase the value and then refinance - taking profits to use as a down payment to purchase another property, presumably right away. The question I have is, "How many times can an average Joe do this until the bank lenders consider them over extended?" After all, every time you accumulate a new rental property, you in turn increase your debt on paper substantially and you also presumably affect your credit score in a negative way.  So in-general, could one "really" expect to acquire an unlimited number of conventional mortgage loans for single family home investment properties - as long as you can produce a 20% down payment??  

[Chris Mason]

Originally posted by @Greg White:

I know one of the strategies I hear frequently on the BP podcasts is to purchase a single family home investment property, fix it up to increase the value and then refinance - taking profits to use as a down payment to purchase another property, presumably right away. The question I have is, (1) "How many times can an average Joe do this until the bank lenders consider them over extended?" (2) After all, every time you accumulate a new rental property, you in turn increase your debt on paper substantially and you also presumably affect your credit score in a negative way.  So in-general, could one "really" expect to acquire an unlimited number of conventional mortgage loans for single family home investment properties - as long as you can produce a 20% down payment??  

(1) Number of financed properties is what is mostly looked at. Things get a little tougher at 4. Then tougher again at 6. 10 financed properties is the cap for fannie/freddie loans with 30 year fixed terms at sexy rates. If you are married, wife can have 10 in her name alone and you can have 10 in your name alone; obviously that doesn't work if you get joint mortgages. 

(2) Plan on having six months of "PITI Reserves" for each property set aside as funds the underwriter can "look at but not touch." PITI Reserves cannot be your down payment or cash to close, it must be distinct funds set aside to cover financial emergencies with your real estate empire. If you want to expand quickly, start putting net profit from rent aside to start building this up ASAP. Retirement accounts will be counted at 60% of vested value; stock/moneymarket/etc at 70%.

Thanks, @Edward Peugh.