How do you buy multiple real estate properties?
As I understand it, when you apply for credit/mortgage to buy a house for example, they check all your pre-existing debt and factor that in before deciding whether or not to loan you the money. So how do some people own multiple properties?
I'm guessing they do it through a corporation or other business entity?
Sorry I'm a little confused, I don't understand how it works. I have a hard time even qualifying for ONE mortgage given my pre-existing debt (car payments, installment debt, etc). Could someone elaborate?
- 1 decade agoFavorite Answer
When you buy a property you classify your purchase as a primary residence, a second home, or an investment property. When buying a second home you will need to be able to afford the additional payment with your income. When you buy an investment property, you can use the income of that particular property to qualify. The banks won't allow to use all of that income, but it is a common practice to use from 75% up to a 90% of that income as part of your income for qualifying purposes.
If you own more than two investment properties the bank can ask for at least two years of property management experience. You can avoid that requirement by hiring a professional property management company, but the expense will affect your ratios.
Other way to buy multiple properties is using private loans, hard money loans (private loans based on equity more than on your credit and with higher interest rates), seller financing, or using subject to financing(when you get the deed, but the loan remains in the sellers name).Source(s): www.xtremeproperties.4t.com
- satarnag01Lv 41 decade ago
If you're able to, you use a corporation, LLC or Trust to purchase the property. Whatever you use, it will need to have the financial means to purchase the property. For example, if you did an asset search on a rich person, you will not see anything as all their real estate is usually in a trust.
Now if you bought a house and you are slowly becoming rich in real estate investing (or whatever) the way it works is that the owners transfer the property into a trust. Then they have the trust make the payments to the mortgage companies. You then send a letter to the credit bureaus stating that the trust, not you, owns and makes payments to the lenders. The credit bureaus will then remove your information and when someone does a credit check, it looks like you are a renter! That's how you bypass the debt to income ratio issue when buying investment property.Source(s): CA Licensed real estate broker with a background in real estate investing
- Anonymous1 decade ago
You buy properties one at a time and each time you wish to finance the purchase with a mortgage from a bank or other commercial lender they will analyze your credit worthiness. However, you could buy property and have the seller finance it and then the underwriting requirements (credit analysis) could be more "casual".
The mortgage on a residence (where you will live) is based on your income and debts. Mortgages on investment property, regardless of the type (a house you plan to rent, an office building, a shopping center, etc.) are based on the capitalized value income stream from those properties.
If you own investment properties and have mortgages on them, they would not necessarily be considered solely as debt in analyzing other properties as the income could (and should) exceed the mortgage payments and operating costs and then, if the properties are "seasoned" (been operating for a few years), the extra income would be used to figure your ability on future purchases.
You do not need a corporation or business entity to buy investment property but they are useful in that they limit personal liability and, if you have multiple properties and do not need to pledge one as security fro another, the use of multiple entities can shield liability from one property to another.
The typical underwriting guidelines for a home purchase financed through a FHA loan are 31/43 - your mortgage payment (typically principal, interest, property taxes and insurance or "PITI") should be no more than 31% of your gross monthly income and your total monthly debt obligation including the mortgage, credit cards, auto loans, student loans, etc. should add up to no more than 43% of your gross monthly income. Other mortgage underwriting requirements typically have more stringent ratios.
If you purchase an energy efficient home the FHA ratios can be “stretched” to 33/45 — 33 percent for PITI and 45 percent for all ongoing monthly payments.
For commercial mortgages, the lender will typically require 110% debt coverage - that means that the income stream from the property (net cash after operating expenses) should be 10% above the mortgage payment. If the mortgage is $1,000 peer month, the property should be producing a minimum of $1,100/month in cash flow.
- 1 decade ago
You can buy properties with seller financing or taking over existing debt on the property through a Trust.
The seller's name will still be on the mortgage but you will own the property in a Trust. The original seller already qualified for the loan. Now you just step in and start paying on the mortgage on their behalf.Source(s): I buy multiple properties without qualifying for a loan.
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- MarkoLv 61 decade ago
If you're asking about properties that have been owned for a while and have on-going operations, then the answer is that lender considers the net operating income for each property, not just the debt service.
For example, let's say I've owned a rental house for several years. If rent received (i.e., effective gross income = gross potential rent less vacancies) is $24,000 per year, and expenses are $8,400, or 35% of effective gross income, then net operating income (NOI) is $15,600 per year ($24,000 - $8,400 = $15,600). If debt service (amount paid on the loan) is $13,000 per year, then the property has debt service coverage of 1.20x ($15,600 = 1.20 x $13,000), and the property nets $2,600 per year in cash flow ($15,600 - $13,000 = $2,600).
This property would effectively provide an individual income of $2,600 per year in addition to any other income he has, because this is the actual profit - the $13,000 in debt service wouldn't count against qualifying for any other debt, because this debt amount is offset by net rental income received.Source(s): I'm a lender (I do mostly construction loans, but also a lot of apartment loans)
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- 1 decade ago
it's called earning a lot of money to begin with. to qualify for a 2nd property, you need to be able to afford the add'l payment. if you plan on renting it, you'll either need to document you have a history of managing the add'l debt or can pay the extra payment with no rents received. if we do count the rent in your income we either take it off of you tax returns (sch e) if you currently own it or take 75% of the projected rent less the mortgage pymt, taxes and insurance.