Yes. I own 10 properties 2 are free and clear. It is nice to collect the money and not have a mortgage. I also find myself not in a hurry to get things done as quick because they are paid off. Bad habit to get into. I'm thinking of refi now ( I have to do within 6 months) while rates are low and buying more units.
For advanced investors and those wanting to buy more than 4 units here is my take on mortgages:
I have always been on top of mortgages and underwriting guidelines which unfortunately gives me more knowledge than most mortgage brokers. It is hard to find a good mortgage broker that knows what he/she is doing. This isn't to bash on the profession but most are geared for your basic owner occupy purchase black and white loan. When you get into the investors arena competent brokers that are willing to do the work are hard to find but they are worth their weight in gold when you find one. Specially starting out. The guidelines have changed drastically over the last 10 years. I am not an expert but this is what I have figured out from hours of research and asking questions from my mortgage brokers. Most of this information can be found on a google search for Fannie Mae investor guidelines, cash out, or 5-10 units.
Their are 2 main ways a bank can do a loan. They can prepare a loan for a portfolio loan (more on this later) or they can prepare a loan that meets Fannie Mae guidelines. Most banks when the loan is complete and they have collected all their fees they sell the loan on the secondary market. This was the problem with the real estate bubble, bad loans were sold but that is another subject.
Most banks use Fannie Mae guide lines because once they sell the loan they get more cash in to do another loan and charge more fees. Thy are "flippers". They find the property (borrower), Do all the repairs (underwrite the loan) and sell on the secondary market. Step and repeat.
Fannie Mae guidelines changed as of 2009
1-4 mortgages
Fannie Mae guidelines are the same for the most part on 1-4 properties of 1-4 units. This is where most investors will fall and where most banks are comfortable lending. Once you have an investment property you now have to provide leases and the loan becomes a little more difficult. You have vacancy factors, capex, management fees, FMR, FMV, appraisals, front end ratios, back end ratios. Many times you will need letters to be written to explain things. Many brokers don't want to do the work. You will see a separation here from brokers looking for the automated acceptance to the professionals that step up and do what it takes. An investor in this category is similar to buying their first rental. Same hoops. You can get a first, put together a heloc for repairs and to buy more property. You can refinance and take cash out for new purchase.
5-10 mortgages
Now it gets a lot more interesting. Many banks don't even want to tread in these waters. The Fannie Mae guidelines become a lot more stricter. The LTV goes to 25% for SFR and 30% for 1-4 unit. So you will need a larger down payment. They want 6 months of PITI payments in reserve liquid funds for all your properties. All of the paper work above but now for 5-10 properties. If you have 4 plexes now you are talking about getting 20-35 leases and documenting everything. This loan now becomes a lot of work requiring many hours to put together. A good broker will be willing to do it. Once you hit 5 properties you can no longer get cash out (delayed financing exception). This also means for your existing properties. It may take you several years to get to this position. You may have seconds on some of your properties. you may have bought a property 15 years ago for 100K you have a mortgage for 80K. 5 Years later you get a 50k Home equity line of credit (HELOC). To continue buying property and to fix things up, another 5 years go buy and you are now ready to buy your 5th house (mortgage). You think when this is done I would like to combine the first and 2nd of my old investment property and get a new first and take advantage of the low interest rates. Maybe you even paid the first down to 60K. So you are looking at a new first of only 110K on a property worth 175K. Because you will be in the 5-10 mortgages and refinance for a second is considered cash out you will not qualify or be able to pull cash out. For those cash buyers. Fannie Mae changed the rules in 2009 because of the number of foreclosures that were taking place and to try and encourage investors to buy inventory from the auctions. If you fall into the 5-10 category and are fortunate enough to buy a property all cash at close. Fannie Mae will let you take advantage of "delayed" financing. In a nutshell they will let you refinance and pull out 65% LTV.
Over 10 mortgages not available for Fannie Mae guidelines seek alternative funding or find a bank that does portfolio lending.
A lot of smaller banks under 10 branches or credit unions are focused on their clients and offer what is called portfolio loans. All this means is that they are not planning to sell on the secondary market so they don't have to meet Fannie Mae guidelines. When the loan is done they plan on keeping the loan as part of their portfolio and will continue to collect the payments. This is great for you because it is back to old school banking. Lets loan to the people of character and look at the over all package. Don't get me wrong the numbers still have to make since but they make up their own guidelines. They can play with the ratios. The downside to this is sometimes they don't want to tie up their money. You may have a hard time getting a 30 year fixed rate mortgage. Most of these loans are looked at as a commercial loan. You may get a 30 year amortization but maybe a 10 year balloon. Because these are portfolio loans, they make up the rules. I would encourage once you are comfortable with real estate investing and you want to continue to invest you start looking for banks that offer portfolio loans and start to build a relationship with them.
For those that took the time to read this, you now more than most brokers and most bankers.
Next time you walk into your bank ask your banker can I ask you a question.
"Do you guys do real estate portfolio loans?" If you don't get that deer in the headlight look he/she will quickly guide you to the manager or to someone that does "loans" because that is all they understood. Once you get to a "mortgage specialist", you can ask if they do portfolio loans or if everything they do has to meet Fannie Mae guidelines. They will probably say they use Fannie Mae guidelines. Your next question is " if I own 5 properties can I refinance to take cash out as long as my LTV is under 70%" If they say yes, move on because they don't know the rules. If they are humble and say I'm not sure let me check into it, then they might be willing to do the work to get it to go through. If they say not if you own 5-10 properties. Fannie Mae won't allow cash out refinance. They know their stuff and that is the broker you want to work with. Good luck in your future portfolio building.
Buy Right!
