If you are a real estate investor and want to grow your rental portfolio, you are eventually going to run out of money to buy new properties.
That’s true whether you start with $1,000 or $1 million. Once you buy enough properties, your funding is going to run out.
I’ve been there and know the frustration that this can cause. So what is a determined investor to do?
Good question. Fortunately, you don’t need to reinvent the wheel. We have collected some great strategies for continuing to grow your rental property portfolio even when you run out of cash.
We will go into each of these strategies in detail, but here’s a preview of what we will cover:
How to Keep Buying Rentals When You Run Out of Money
Use Equity In Existing Properties
Borrow Funds For Down Payment
Use Tax-Advantaged Accounts
Sell Existing Properties
Convert Home Into Rental
Buy “Subject To”
Before we get into the strategies, let’s cover some high-level questions you may have about limitations on growing your rental property portfolio. If you want to skip the introductory stuff, you can jump straight into the buying strategies by clicking here.
The information contained in this post is for informational purposes only. It is not a recommendation to buy or invest, and it is not financial, investment, legal, or tax advice. You should seek the advice of a qualified professional before making any investment or other decisions relating to the topics covered by this article.
Table of Contents
Is There a Maximum Number of Rental Properties I Can Own?
There is no maximum number of rental properties you can own. You are only limited by the amount of funds you have to purchase properties.
There are investors who own hundreds of rental properties.
That being said, growing successfully takes more than just money. You need to buy great properties, make sure they cash flow, and manage them effectively to ensure a profit.
Is There a Maximum Number of Rentals I Can Finance?
There are limitations on how many rental properties you can finance. If your loan is from a lender that is selling the loan to Fannie Mae or Freddie Mac (nearly half of all mortgages fall into this category), you will face a limit of 10 financed properties.
However, an announcement by Fannie Mae in March 2021 indicates that they will be tightening lending standards on investment properties even further.
To make matters worse, certain lenders may impose their own limits on top of the Fannie/Freddie limits, so not all of them will allow you to finance 10 investment properties.
The bottom line is that growing your rental property portfolio is becoming tougher due to more stringent lending requirements. Fortunately, other lending options are available to investors.
There are a host of direct lenders that do not follow Fannie and Freddie guidelines because they fund their own loans. So they are free to use whatever lending standards they want.
Direct lenders use different underwriting standards than standard mortgage lenders and may require stricter loan-to-value ratios. They also typically come with higher interest rates and fees than standard mortgages, but that’s the price you pay for accessibility.
Here is a list of direct lenders offering loans for rental properties.
If you have more than 10 financed properties and want to gain access to Fannie and Freddie loans, you may want to look into blanket loans. These are loans that are secured by your entire rental portfolio, not just one property. You need to go to a direct lender for these too.
The biggest advantage of using a blanket loan is that you get one big loan that eliminates all of your existing mortgages. This allows you to start financing again through conventional Fannie and Freddie programs, since you are no longer limited by the 10 financed properties restriction.
Here is a list of lenders offering blanket loans for rental properties:
Ok, now that we have taken care of the introductory stuff, let’s dive into the strategies for growing your rental portfolio when you run out of money.
How To Keep Buying Rentals When You Run Out of Money
Use Equity in Existing Properties
If you have equity in your primary home, you can take out some of that equity in the form of a loan.
You can do a “cash-out” refinance, where you refinance out of your existing mortgage into a bigger mortgage and receive a check for the difference at closing.
So if your current mortgage is $100,000 and your house is worth $300,000, you may be able to do a cash-out refinance for a new $240,000 mortgage. That new mortgage would pay off your existing mortgage and you would pocket the remainder, which is $140,000 (less closing costs). You then can use the $140,000 to buy one or more additional rental properties.
Alternatively, you can get a home equity line of credit (HELOC) and take out money as needed. I like this option better.
In the same scenario, you would keep your existing $100,000 mortgage, but you get a second mortgage in the form of a HELOC which has a line of credit for $140,000. You can draw on this HELOC anytime you want. The great thing is you only pay interest on the amount that you have drawn.
These strategies can also be used on your rental properties. If your rentals have enough equity, you can do a cash-out refinance or get a HELOC on them.
You may need to hunt around for a lender who offers these options on rental properties, but they can be a really effective way to continue expanding your rental property empire.
Another way to continue buying properties after your money runs out is entering into partnerships with people who want to invest with you. If you know someone who wants to invest in real estate but does not have the expertise or desire to manage properties, you can partner with them.
They can put in the cash for the down payment and you can find and manage the property. You would then split the profits from the real estate investment according to the agreed-upon terms.
There are many variations of this, including complicated real estate syndications involving many investors and millions of dollars. If you want to explore this option, you want to be mindful of securities registration issues and properly structure your real estate syndication.
You should consult with a securities lawyer familiar with real estate syndications before going this route.
Borrow Funds For Down Payment
You can borrow funds from various lenders to cover down payments on new rental purchases.
How much is the required down payment for an investment property? The standard down payment required for a rental property used to be between 20% to 25% of the purchase price, but that has now decreased to just 15%. Every little bit helps!
Ok back to the borrowing discussion. Here are some borrowing options for you to consider:
Peer to Peer Lending.
Peer-to-peer lending has been around for a while now and can be a great option to fund your down payment. You basically use prosper, lendingclub, or any of the other peer-to-peer lending platforms to apply for a personal loan. If you get accepted, you can use that money as your down payment for your next rental property. Here is a good comparison chart of various peer-to-peer lending platforms.
A more traditional option is a personal loan from a bank or credit union. Similar approach here – just apply and use the funds for the down payment.
You may be able to take out a loan against balances in your 401(k) to fund your down payment. This option is a bit more exotic than the ones discussed above. But the cool aspect of this approach is that you are borrowing money from yourself, so you are paying yourself back (with interest).
Not all employers allow you to do this and there are limitations on how much you can borrow (the lesser of 50% of your assets in the 401(k) or $50,000).
If you pursue this option, one thing to note is that you will need to pay back the entire loan balance within 60 days if you leave your job.
If you don’t, the withdrawn amount will be subject to taxes and penalties if you are less than 59.5 years old.
Obviously, borrowing from your 401(k) may not be ideal from a retirement planning viewpoint because that money should be dedicated for retirement.
But if you are aware of the risks and feel that investing in rental property is a better path toward securing your retirement, this is an option you may want to explore.
Update: If you have been affected by the pandemic, the CARES Act allows loans up to $100,000 and has relaxed other requirements for 401k loans (like allowing you up to 6 years to repay the loan). Source: CNBC
Did you know that if your securities brokerage account is a margin account you can use that margin (which is basically a loan from the broker to you) to fund your down payment? Some brokers offer really low interest rates for margin accounts right now, so it could be an interesting option.
But there are significant risks associated with this strategy. Namely, if the securities that are backing up the margin loan decline meaningfully, you may get a “margin call.”
That is really bad and it could cause you to lose a lot of value in your securities account. I wrote an article discussing in detail the pros and cons of this form of investing if you are interested in learning more.
Hard Money Lenders
Hard money lenders are another option to expand your rental property portfolio when your cash runs out.
These are usually private lenders who charge high fees, high interest rates, and require very strict loan-to-value ratios.
On top of that, they usually offer short-term loans, which means you will need to refinance shortly after you buy the property.
Hard money is mostly used by flippers who are in and out of a property quickly and just need someone to front the cash for a little while.
If you can find an extremely undervalued property, you may be able to convince a hard money lender to loan you the entire amount of the purchase price because the loan to value still meets their requirements.
For example, if your target property has a market value of $100,000 but you can buy it for $50,000, then your hard money lender may be willing to lend you $50,000 because the loan to value is still 50%, which is very conservative.
The trick, of course, is finding a property at that price. Unless you are in the flipping business and have a very strong pipeline of leads for distressed sellers, your chances of finding a property at that price are slim.
I don’t like using hard money for rental properties for all of the reasons I listed above, but I chose to include it as an option for the sake of completeness.
Closing Thoughts on Borrowing:
As you can see, there are many ways to fund your down payment by borrowing funds.
Bear in mind that borrowed funds deposited in your checking account may need to be “seasoned” for a while before you can use them as a down payment. Typically funds are considered seasoned after around 60 days, although some lenders may have different seasoning timeframes.
Word of Caution: The borrowed funds under some of these strategies may show up on your credit report and the payments on that debt may be counted toward certain debt to income ratios that need to be met if you want to get a mortgage for your next rental property.
Use Tax-Advantaged Accounts
If you have a Roth IRA, you can withdraw the “contributions” portion of your balances without penalty or taxes at any time and for any reason (because you have already paid taxes on that money).
Obviously, if you want to withdraw contributions from your Roth IRA for a down payment on a rental property that is 100% allowed.
Alternatively, you can use your IRA to buy rental properties directly without withdrawing funds. You do this by setting up a self-directed IRA.
I did this years ago for three of my rental properties and it has worked out well. I wrote an article on how to do this, which takes you step-by-step through the process.
Finally, you can use your HSA to buy rental properties. Like IRAs, you need to set up a self-directed HSA to do this. This is a strategy that almost no one knows about, but it can be a great additional source of funding for your rental property purchases.
To learn more about this innovative strategy, check out my article on the topic.
Sell Existing Property
This sounds counterintuitive I know. You don’t want to sell your properties, you want to buy more.
But sometimes taking one step back and two steps forward gets you to your goal.
You may want to consider this strategy if you have a rental property that has a lot of equity. That’s because that pent-up equity is not being used to generate any money for you.
You could gain access to that equity through a cash-out refinance or HELOC as we discussed earlier, but those methods will increase your monthly payments and may create a cash flow problem.
If you sell your property, you unlock the equity, but don’t create cash flow issues. You can then use the proceeds from that sale to buy multiple properties.
Here’s an example.
Let’s say you bought a property years ago for $100,000 and put in $20,000 as a down payment. Over time, that property has appreciated to $300,000, and you have paid down the mortgage to $50,000.
That’s a great situation, but the $250,000 of equity is just idle at this point – it is not earning you any money.
But if you sell that property and use the proceeds to buy 5 new properties ($50k down payment each), that money is working for you. If each of those new properties gives you a 10% ROI, that is an extra $25,000 that you are earning each year that you did not have before.
Of course, you will have to pay taxes when you sell your property, so that can impact your returns.
But there is an option known as a 1031 exchange where you can sell an existing property and exchange it for a new property. If you do this correctly, you can defer the payment of capital gains taxes on that sale.
It gets a bit tricky when you are selling one property and buying multiple properties because you have to complete all of the transactions within a designated time or you lose the preferential tax treatment. But it can be done.
If you want to learn more about 1031 exchanges, check out this article by Investopedia on the topic.
Convert Your Home to a Rental And Buy a New Home For Low Money Down
If you have an existing home, you can convert it into a rental property and buy a new home with an FHA loan. This can be a low down payment option because FHAs require as little as 3.5% down if you qualify.
Also, FHA loans are not just for first-time homebuyers (a common misconception), so this strategy can be used even if you already own a home.
Source: the mortgagereports
Although a 3.5% down payment is not the same as a zero down payment, it is pretty small compared to the standard 15% required for most property purchases. And you may find it much easier to fund a 3.5% down payment with some of the other methods discussed in this article.
The lower down payment really makes everything easier and gives you a higher probability that those other methods (or any combination of those methods) actually get you to your goal.
Here’s what I mean.
Imagine you are looking to buy a $200,000 home. If you have a normal mortgage, you need 15% down or $30,000. If you get a 3.5% down FHA loan, you only need $7,000.
If you are using the partner strategy to get a no-money-down deal, try asking your rich uncle for $30,000. Unless he has more money than sense, you will need to do some real convincing. But $7,000 is a much easier sell.
What if you only asked him for $3,500 and tried to find a $3,500 loan through peer-to-peer lending or other sources? The probability of getting a “yes” from him is getting pretty good, right?
Using that same example, getting a $3,500 loan for the remaining amount is going to be much easier than a $30,000 loan, no matter who the lender is.
Plus, after living in the new place for a while, you can rinse and repeat (i.e., buy, live for a while, rent out, buy a new property, live for a while, rent out, etc.). I know of real estate investors who have collected a very nice portfolio of rental properties this way.
House hacking is a real estate investment strategy where the investor buys a small multi-family property (normally 2-4 units), lives in one of the units, and rents out the others.
The rent from house hacking can allow the investor to live in the property for free or at a greatly reduced cost. In some cases, the investor may house hack his way to a profit each month.
Buildings with four units or less work best because you can still get an FHA loan.
As with the previous strategy, this is not a “no money down” solution, but you get to purchase a multi-unit property with only 3.5% down.
And, as I said before, you will have a much easier time finding the money for a 3.5% down payment as opposed to the 25% down payment for these types of multifamily properties.
As I mentioned above, an added bonus is that you can use the rent you are getting from the other unit(s) to cover some or even all of your mortgage payment. That’s huge.
You can really skyrocket your wealth if you recycle this strategy (similar to what I discussed in the prior strategy) because you are gaining multiple rental units each time you do so.
I wrote an in-depth article on investing in small multi-family units, which includes a great discussion of house hacking and its awesome benefits.
Bonus tip: I also compared house hacking to room renting (which is another great strategy for getting extra income through your property). We compared them head-to-head based on actual data that I pulled together.
To learn the winner and get some great info on both strategies, check out my article here.
Lease options are another way to invest in a rental property with no (or little) money down. The typical lease option works like this.
You have found a property that you are interested in buying as a rental but you don’t have the money for a down payment. You talk to the owner to see if they are willing to offer you an option to purchase the property along with a lease to the property.
If they are living in the house and need money to buy a new place, it will be a tough ask.
For example, let’s say the property is worth $100,000 and you offer the owner $3,000 to have the right (but not the obligation) to purchase his property in five years for $100,000.
You also get a lease that allows you to rent out the property at a discounted rate of $1,000 per month for the next five years (let’s assume market rent is $1,100). You would argue that you should get a lower than market rent because you are taking on such a long lease term.
If the owner is having a hard time selling the property the traditional way, they may take the $3,000 now and be happy that they found a 5 year tenant.
You now have a five-year lease and control the property for $3,000 instead of the $20,000 down payment that you would have needed under the traditional buying method.
You then go out and find a tenant that will rent your place for $1,200 and you pocket the difference between your rent and the tenant’s rent each month.
In five years, maybe the property has appreciated to $110,000. In that case, you can exercise your option to buy it for $100,000 and earn additional profit through this arrangement.
There are more advanced strategies when it comes to lease options, like sandwich lease options, where you offer a “rent to own” program for tenants. In that strategy, you do exactly what I described above, but when you are looking for tenants you offer them a lease option.
So they pay you $4,000 as an option fee to buy the house for $110,000 with a rent of $1200. You pocket the difference all around.
There are a lot of real estate investors who use this strategy with success, but I would tread with caution before moving forward because there are some legal pitfalls that you must navigate when using this strategy.
Seller financing is a real estate investment strategy where the seller, rather than the bank finances your purchase of the property.
If the seller is motivated enough, they may offer to finance the entire purchase price, meaning you have a zero down deal.
But those sellers are going to be rare. You will need to find a seller who owns their property outright (i.e., has no mortgage). If they don’t, you may need to do a “wraparound mortgage” where the existing mortgage is rolled into a larger loan made by the seller.
But if you do that, a due on sale clause in the bank’s loan agreement with the seller may be triggered, which could make the entire mortgage come due. This will likely blow up the whole deal.
Also, seller financing deals usually involve shorter-term loans, with a balloon payment at the end. If you can’t find alternate financing when the balloon payment comes due, you will either need to pay the full amount or default on the loan.
Buying a Property "Subject To"
Here’s another unconventional investing strategy that most people haven’t heard about.
Buying a property “subject to” is a real estate investing strategy where you purchase the property “subject to” the existing mortgage. In this strategy, you take over the payments on the existing mortgage in exchange for ownership of the property.
This strategy may work as a no money down investing strategy if you can convince the seller to let the property go for the price of the existing mortgage. But most sellers may not be that desperate.
You may still be able to get a no-money-down deal if the seller is willing to offer seller financing for an amount above the existing mortgage. In this case, the seller gets a higher purchase price, but you will end up with two mortgages to pay.
As with seller financing, if the property is sold with an existing mortgage in place, it could trigger a due on sale clause.
There you have it – ten ways to keep buying rental properties when you run out of money. If you are aggressively growing your rental portfolio, the day is bound to come. Hopefully these strategies will help you overcome this obstacle when it happens and you can keep expanding your rental empire without missing a beat!