You may already know someone like this. Someone who owns and finances several rentals, all at the same time. I mean, they must make a lot of money, right? If someone owns 10 rental units, that’s 10 mortgages. Plus, taxes and insurance. So how do they pull it off? It has a lot to do with rental income.
Yes, real estate investors rely on rental income to not only cover the costs of owning, but to generate some additional income. After all, why would someone buy a rental property that didn’t show a positive cash flow? Doesn’t happen. Maybe in an extreme case but in general the reason to invest in real estate is for the cash flow and long-term appreciation. But someone doesn’t need to be wealthy to own all those properties.
But here’s the kicker: borrowers can’t use the income from their first investment property in order to qualify. Instead, the borrower must qualify without the benefit of any rental income, even though it’s clear it exists, there are people occupying the property who pay rent each month. Further still, lenders want to see a track record of being able to pay the expenses along with managing the property and the tenants. This track record is two years.
Also, the minimum down payment for investment homes is 20% and borrowers can get a slightly better deal with a 25% down payment. That might be the biggest obstacle for some, coming up with that amount of down payment each time they want to buy another rental.
However, once the two-year track record is met, the qualifying guidelines change. On the subsequent purchase, lenders do allow the income from the rental to help qualify. If the property does cash flow, that means investors don’t get hit up with the mortgage payment without the benefit of rental income. From that point forward, the rental income can be used to offset the expenses of owning. Investors don’t need to qualify for additional rentals on their own but instead, take advantage of the rent being paid each month. This is how people can own multiple rentals because it’s not considered a monthly expense any longer but provides additional income.
There may be some niche type mortgage products out there that allow for lower down payments and such but those will come with higher rates and more than likely adjustable rate loans instead of the security of fixed rate mortgages.
