If you’re a real estate investor looking to expand your portfolio by purchasing multiple rental properties, you’re likely weighing the risks and rewards associated with owning real estate. Plenty of people have found success with the endeavor, but if you don’t play your cards right, you may find yourself overwhelmed. To help you decide if this investment is right for you, we’ve broken down how to buy multiple properties and the pros and cons of doing so.
How to Buy Multiple Rental Properties
Unless you have enough extra cash on hand to cover the cost of multiple properties, you’re going to need financing to build your portfolio.
Buying a single rental property is typically straightforward. Borrowers can take out a conventional loan, just as if you were going to live in the house. But as you begin to take on multiple single-family and multi-family dwellings, the process changes.
In that situation, an individual or business would take out a commercial loan to finance their purchase.
Commercial Loans for Multiple Rental Properties
Commercial loans are loans extended to businesses by a financial institution.
Commercial loans are most often used to fund the purchase of long-term assets”
Commercial loans are most often used to fund the purchase of long-term assets— like a rental property, for example. After the purchase, the property’s income would cover operational costs. The business would then hold some of this income as a buffer against emergencies, while potentially distributing any earnings beyond that to the owners.
Commercial real estate loans have several key differences from residential loans. For one, the loan terms are typically much shorter. Instead of having a 30-year mortgage, a commercial loan term is anywhere between five year or less than 25 years. Additionally, real estate investors should be prepared to put down a larger down payment for real estate purchases. Loan-to-value ratios are generally between 65% and 80%, meaning you’ll need to put down at least 20% to 35%.
The good thing about commercial real estate loans, however, is that they can be much more flexible than residential loans. The right commercial lender will work with an investor or business to craft a loan that fits their business strategy.
Pros and Cons of Buying Multiple Rental Properties
Weighing the advantages and disadvantages can help you better understand if buying multiple properties is the right business move for you.
Pro: It can be a steady source of income.
There may be times where no one is occupying a specific unit. If you only own one property and you’re in between renters or taking some time to renovate the property, your cash flow dries up without a tenant. With multiple properties, it’s more unlikely that all of your investments will sit empty at the same time. You’ll always be able to look forward to money coming in.
Cash flow and capital appreciation are some of the top reasons that investors decide to purchase multiple properties. After you consider your loan payment and operating expenses, the money you bring in from rentals can be a great source of income. And it gets better over time, too. As you pay off your loan and build equity, your cash flow increases.
Pro: The risk is relatively low.
Compared to other types of investments, real estate is generally considered low risk. There are a few reasons why real estate is one of the safest investments:
- Real estate is a tangible asset: If market conditions deteriorate, it doesn’t change the fact that your property exists. When the market improves, it will still be there and have value. Even when it doesn’t make sense to rent, you can do other things like sell it or even live in it.
- Real estate generally appreciates: The value of real estate usually goes up over time.
- The real estate market is relatively stable: Compared to the volatile stock market, real estate is widely considered a stable investment. This is heavily dependent on the market you’re in; if the housing market is volatile in your area, real estate investing can be riskier. If you live in an economically depressed area, this risk compounds. Keep in mind that all investments come with some risk and that the housing market can crash, as it did in 2008.
Pro: You don’t need to handle all of the day-to-day responsibilities.
Luckily, owning multiple properties doesn’t have to mean managing them all too. With the help of a property management company, you can leave the day-to-day responsibilities up to a team of people who know the rental industry well. This comes at a cost, but it can keep the work of managing rentals from being a full-time job.
Pro: You may benefit from tax breaks.
The IRS gives property owners a tax break by providing deductions for costs associated with operating and managing the properties, making improvements, and depreciation. Keeping good records of all of these expenses can help you when it comes time to pay your taxes.
Con: Real estate is not liquid.
Real estate is a tangible property and lacks liquidity. In and of itself, this is not an issue. However, if you need to sell your property for cash quickly, you may find yourself in a bind. Even in a seller’s market, it can take months to close a deal. Because property is illiquid, it’s best practice to have keep cash reserves at all times to cover any emergency repairs, maintenance, or other expenses.
Con: It can take a lot of work.
If you decide to go the DIY route with your properties, be prepared to do a good deal of work. To start, you’ll have to ensure that your properties are renter-ready. After that, you need to find suitable tenants to rent to. Once you have renters in place, all of your properties will require routine upkeep and maintenance.
Even if you have a property management company handling the day-to-day responsibilities of your properties, there’s still a lot that a landlord has to do while owning multiple properties— and that’s when things are running smoothly.
Using a property management company is not a “set it and forget it” situation. A property management company has to be managed in turn by you, because you are ultimately responsible for the financial health of your investment. Make sure your property management company has a solid strategy when it comes to increasing rents, annual maintenance, relationships with tenants, and regular inspections.
Rental property owners need solid teams of property managers or companies, vendors, maintenance contractors, and other services. Developing a solid team that you can trust will go a long way toward ensuring the health of your investment.
Con: You will have more recurring expenses.
This is really dependent on how many properties you own, and what form they take.
If you own separate multiple investment properties: Think of the expenses that come with owning one house. Now multiply that by the number of properties or units that you own. Property taxes, special insurance for rental properties, paying for a property management company, and maintenance costs are just a few of the costs you’ll face with each house. Unexpected problems, like major damage to a unit or a tax hike, can cause disruptions to your cash flow.
If you own an apartment complex: All of these costs are consolidated. It’s easier to manage a single property with multiple units than it is to manage ten separate rental properties. Buying an apartment complex can actually be less expensive than separate rentals when you compare units to units.
Consider Your Investment with Multiple Rental Properties
It’s always important to calculate your risk when real estate investing. While multiple commercial rental properties can provide a good source of cash flow, owning more than one rental can take a lot of work and get expensive quickly. Understanding your options, advantages, and disadvantages will allow you to determine how it affects your bottom line. If you pursue your opportunities wisely, you may find yourself reaping the rewards!