How to Finance Multiple Rental Properties – Video
Caeli Ridge: Let’s talk about common strategies and sequencing when we’re talking about the 1 to 10. Let’s discuss leverage. There is a difference between spots 1, 2, 3 and 4, and then 5 through 10 in what you can feasibly leverage, meaning the loan to value or also known as LTV. I think that probably when we we’re talking about the debt to income ratio on credit scores, you probably got the feel for there are different requirements in the first 4 conventional loan spots versus the 5 through 10 conventional loan spots.
That also applies to the loan to value and what kind of leverage you can expect. For strategizing and sequencing these properties, if you have this information in advance, you’re able to really monetize on taking your dollars and stretching them just a little bit further.
For example, let’s talk about one through four. We’re going to talk about single-family residence as our example here. The answers are different for a two to four unit property, but for a single-family residence, in spots one through four, you can leverage to 85% loan to value.
Let’s use $100,000 purchase price, easy round number. You could get a loan from us for $85,000. You’ve got four spots for that particular product, knowing that in advance, do you want to put your $70,000 property purchase there or do you want to put one that you might have seen for $120,000 or $150,000 whatever the case may be. Which one of those properties do you want to put in spots one, two, three and four? The higher one, right? Because you’re going to be able to get bigger bang for your buck.
The higher end properties, if you can sequence it this way, you always want to put those in spots one, two, three and four. You’ve got the highest leverage opportunity in that spot. Spots 5 through 10, you’re going to be losing 5% up to 10% of your leverage once you get into spots 5, 6, 7, 8, 9, 10. You can expect, in spots 5 through 10 on a single family residence, you’re going to be limited to 75% loan to value.
When you can just make sure that you keep the larger size homes in the first bucket 1, 2, 3 and 4. Then you can go ahead and put your smaller size purchases in the second set of property.
Let’s talk about interest rates. It’s always the hot topic. Everybody always wants to know, what are the interest rates? I can tell you vaguely, without going into great detail about the specifics, because there’s lots of different criteria that goes into pricing out. Let’s use a 30-year fixed mortgage. I can tell you that today they’re ranging between 4.625 and 5.25. Some of the variables that go into identifying that are, what is the loan to value? What is the property type? Is it a single family? Is it a fourplex? Is that a condo? What’s the borrower’s credit score? Where is the property located?
All of those different things are going to go into quantifying what your interest rate you’ll be able to secure is. In general terms, until you have rates on a 30-year fixed mortgage for an investment property, or ranging again from 4.625 to 5.25, 30-year fixed money, extremely, extremely low, guys. If any of you are currently under contract and you’re hedging your bets and playing the market, I will tell you inflation is looming, it is out there, lock your interest rate. Chances are your loan amount is not great enough for it to make any difference for an eighth to quarter of a point in rate. It’s literally dollars a month. I would take advantage of that. Don’t play the market, lock in your interest rates as soon as you can.
One fun fact that I wanted to share with you guys, the United States is actually only one of two countries on the planet that offers a long-term fixed mortgage rate. Why I find that and why I always like to mention this in my presentations is it creates such a significant opportunity. Living in this country is, for so many reasons, is great. For real estate investors especially, when you try to look at what’s the difference between a 30-year fixed mortgage and a 5 or 10-year fixed mortgage, it’s staggering. The amount of leverage that we can access at the interest rates that are prevailing right now.
I’ll share just a quick story with you guys and then I’ll go to the next slide and give you the example, it’ll blow you away. Back in the heyday, I’m an investor myself, so the last cyclical market that we had, I had 42 properties collectively, and not one of them cash-flowed, not one. The entire play then was appreciated.
Looking at it conversely, 10 years later, it is really that perfect storm. You have still great leverage at the lowest possible interest rates that you can imagine on an investment property. Every property right now, almost without exception, that comes across my desk cashflows $200, $300 or $400 a month. Again, speaking of single families, that answer would be different for like two to four units.
That’s profound. It just blows my mind that we went from one extreme to the other. I think that my least negative property back then was probably at least $100 a month. Now, it’s up to thousands, depending on the property and where it was located, et cetera.
Now you, guys, have the opportunity to look at price points that are far more reasonable, interest rates that are just stupid low, and a 30-year fixed mortgage. Watch this. This is what other countries deal with, and why real estate investing in this country is so incredibly awesome. We’re going to compare the United States mortgage market with pretty much everywhere else in the world.
We’re going to use $100,000 loan on a 30-year fixed mortgage at 5%. Then, I’m going to take $100,000 loan on a 5-year fixed at 4%. I’m even giving them the benefit of the doubt and the lower interest rate [06:25].
Look at those numbers. Really? Isn’t that just amazing? The fact that we can leverage at such interest rates, and I know I’m beating a dead horse here, but the 30-year fixed amortization is just so awesome.
Then lastly on this, I want to touch on the difference between the 30-year and the 15-year, because that question does come up quite a bit. A lot of people say, “I want a 15-year mortgage. I want to pay off in 15 years.” Couldn’t agree more. You want to accelerate the payments. Of course, why not? These are long term investments, right?
My strong inclination is to keep the 30-year fixed mortgage and here’s why. If you look at the difference between a 30-year fixed mortgage payment and a 15-year fixed mortgage payment, and let’s use the $100,000 model that we have here, yes, the interest rate is going to be slightly lower on the 15-year, but what’s going to happen to our payment? It’s going to go up exponentially because it’s amortized over half the time, 15 years versus the 30 years.
What I recommend for people to do, for a variety reasons that I’ll share with you in just a second, is to figure out the difference between the 30-year fixed mortgage and the 15-year fixed mortgage and simply apply that difference with your 30-year fixed. What have you done? You’ve kind of gotten the best of both worlds by allowing yourself to accelerate the mortgage on your terms.
What you’ve done here takes discipline, right? You’ve got to have the diligence to make sure that you send that extra payment with your 30-year fixed mortgage, but you have increased your chances for qualification in the future keeping your debt-to-income ratio low, or down, with your new mortgage, right?
Versus getting the 15-year mortgages on everything. What’s going to happen to your debt-to-income ratio? It’s going to take some hits with those higher payments. You are able to take that difference, apply it with the 30-year, and your pay off time, it won’t be exactly 15 years, but you’ll reach the finish line in somewhere around 15.4, 15.5 years.
You’ve accomplished exactly the same thing as the 15-year mortgage on a 30-year. Your feet are not held at the fire with the higher payment. Let’s say you decide there’s one month that you had some extra repairs, or the tenant moved, out or whatever the case may be, you can choose not to apply that difference that month if you decided to. Nothing’s obligating you to do it, and you’ve kept your debt to income ratio in the optimal position. Fifteen, versus 30-year, always go for the 30-year. That’s my recommendation.