Today’s question comes from Andrew and he says, hi Marco, thanks for doing this podcast. Can you please do an episode on how to continue growing your portfolio of rentals past the 10 mortgage limit for each spouse? So after 20 mortgages for a couple, I guess that’s to imply that we can continue investing, what kind of lending should you take advantage of after 20 mortgages on the way to 100 properties, if you continue acquiring turnkey properties, let’s assume the scenario includes continuing to buy properties, using our W2 income and also taking advantage of 1031 exchanges and cash-out refinances, if appropriate on the way to grow from two 20 to 100 properties, at some point in your growth, you may want to pull equity out and it may involve selling a property with a mortgage on it to 1031 exchange into two properties that use a commercial loan. And I’d like to hear how that would play out. One key assumption is I would continue to buy single-family homes due to higher quality tenants and higher rents on average over multi-families.
Thanks, Andrey.
Thanks for the question. So your basic question here is how do I get past the 10 mortgage limit to continue growing my portfolio? So the first thing I want to say is that if you’re doing a 1031 exchange into two properties, as you laid out in your question here, it doesn’t mean that you have to use a commercial loan. In fact, that is not true. You would still be using conventional financing more often than not unless you’ve reached that mortgage limit, you’re concerned about in which case you’re going to use some sort of portfolio lender. So here’s the basic rule you are allowed to have up to 10 loans from Fannie Mae, Freddie Mac, basically what we refer to as a GSE or government-sponsored entity.
So Fannie Mae Freddie Mac are basically underwriting or insuring these mortgage loans that you’re going to get from your lender. And you are allowed to have 10 per credit score. So you can have 10, your spouse can have another 10. So theoretically between the two of you, you can have up to 20 conventional loans and that now reaches kind of a hard limit and you just can’t get any more conventional loans. Why do you want to start with conventional loans? Well, the simple answer is because they are the best. They are typically the lowest rate and they have 30 year fixed rate terms. You could also do a 15 year fixed rate as well, but for most situations, I happen to prefer the 30 years fixed-rate mortgage. So it’s cheap money. So if you can get cheap financing and you can get 10 yourself and 10 for your spouse, great, you’ve got 20 mortgages to work with there 20 slots, if you will, on your credit. So once you fill those 20 slots, 10 and 10, then what do you do? And that’s the basis of your question here. So what you would do at that point is one of two things. The best answer is to start working with a lender who does not work with Fannie or Freddie, and they are often referred to as portfolio lenders. And that’s because they just have their own portfolio of notes that they service. And they have typically their own funds and their own lines of credit. So they may not necessarily be selling that loan of to another lender or servicer, with conventional loans, the lender will typically at some point, sooner than later, sell that mortgage off into the securities market. And then it becomes just a bundle of mortgages. And that becomes securitized on wall street. And people are essentially investing in that bundle of mortgages.
So with a portfolio lender, they control their own money and they essentially write their own rules. So therefore they can give you virtually an unlimited number of loans. So as long as you qualify or the property qualifies, if they’re more assets based, as opposed to personal credit score or credit profile based or income-based, you can theoretically have an unlimited number of mortgage loans from these lenders. And there are many lenders out there that are portfolio lenders. They control their own warehouse lines and they call the shots. So generally speaking, what you will find is that the terms are going to be similar, but not as good. So they’ll still offer 30-year fixed-rate mortgages. Some of them do 15. The interest rate will be a little higher, how much higher really depends on the point in time. And when you listen to this, because it ebbs and flows, it does change. At one point, I took a look and it was about 1%, a full point higher than what you would get with conventional, but I’ve also seen it as high as two, three, four points higher and keep in mind. There’s other variables that are at play here, such as your credit score, your overall credit profile, your liquidity assets you have on hand, maybe how many mortgages you have.
So what they typically play with are two variables. One is the interest rate. The second variable that they like to play with is your loan to value. So with conventional financing, you typically will have up to 80% financing, which means a 20% down payment. With a portfolio lender, they can, and I’ve seen them do 80% loans, but often it will be a little less. Now it could be 80%. It could be 75, it could be 70. I’ve seen it as low as 50 during COVID because they just got skittish and they wanted to be conservative and pull back. But it’s reasonable to expect that it will be between 60 and 70% loan to value. But I have seen many times 70, 75% loan to value. It just depends check with my team or check with a portfolio lender, contact one of many, and they’ll tell you what is available. So that’s how you get past the 10 mortgage limit to continue growing your portfolio beyond that 20 and keep in mind. One last thing that applies to anything that is a residential property, meaning it’s a one to four-unit property. So duplexes, triplexes, fourplexes, and single families, condos, and whatnot as well, typically qualify as well.
So the only other option there is really not an option in my opinion, only in certain situations, but you can find lenders that will do a refinance of two or more of your mortgages on those properties and give you essentially a commercial loan. And what they’re doing is they’re essentially refinancing those mortgages and creating one blanket mortgage or one master loan that is collateralized by multiple properties that you have. And in doing that by essentially refinancing those properties, those loans, the mortgages come off your credit because they’re essentially paid off, they’re paid back. And that’s how you free up those slots on your credit to do another 10 or whatever it may be. That is another option and beyond the scope of this, but just realize that that option may be out there and has been in the past.
So that’s it for today. Thank you for the question.I appreciate it. It’s great.
So that’s it for today, download your free report, The Ultimate Guide to Passive Real Estate Investing. If you’re listening to this, it’s a great primer on investing in real estate, especially if you want to be a passive investor, meaning you just want to benefit from cash flow and equity growth, and net worth increases over time. That is how most people build and preserve their wealth. Get your free strategy session from our investment counselors. Just reach out to my team and we are happy to spend some time to help you map out a plan to build your portfolio. And that’s it for today.
Thanks for listening. I will see you on our next episode.
———————–
Are you having a hard time finding great investment properties? Unfortunately, the best deals are rarely found locally successful investing begins with the right properties in the right markets. Norada real estate provides everything you need to invest in the best deals across the US. Our simple proven system will help you create real wealth and passive monthly cash flow. Get your free copy of the ultimate guide to passive real estate investing at www.NoradaRealEstate.com/guide.