Investing in real estate is a proven strategy for building wealth, but you may be wondering how to buy multiple rental properties when financial resources are limited. Some investors have found success in various creative financing methods, paired with strategic approaches tailored to their resources.
At Defy Mortgage, we specialize in helping individuals find creative ways to reach their financial goals. Each of our 75+ non-traditional loan options can be fully customized to suit your needs, whether you’re a freelancer or self-employed individual trying to buy your first home or a real estate investor or entrepreneur looking for affordable investment property loans for profitable rental properties.
In this guide, we’ll explore various financial strategies that investors have successfully used to enter real estate investing with minimal personal investment. We’ll also discuss the BRRRR (Buy, Rehab, Rent, Refinance, and Repeat) method and how savvy investors are using it to power their ever-growing rental property empires.
Understanding the Challenges of Buying Multiple Properties
Figuring out how to buy multiple rental properties can be difficult even without the added obstacle of limited funds. However, it’s not impossible. By understanding the challenges you’ll face, you’ll be better equipped to respond to any issues that may arise. Let’s break down the most pressing ones:
- High Down Payment Requirements: Traditional lenders often require significant down payments for each property, which can quickly deplete available funds.
- Securing Financing: Limited funds or credit issues can make it difficult to obtain traditional financing for multiple properties.
- Cash Flow Constraints: Managing multiple properties requires sufficient cash flow to cover mortgages, maintenance, and unexpected expenses.
- Risk Management: Scaling investments increases exposure to market fluctuations and tenant-related risks.
Overcoming these challenges becomes easier with strategic planning and the utilization of alternative financing methods.
Financing Strategies to Buy Multiple Rental Properties with Limited Funds
While buying and managing multiple rental properties can be challenging, savvy investors have surmounted those challenges by leveraging various creative financing strategies. Let’s go through some of the most popular ones.
DSCR Loans
DSCR loans are a loan product whose terms are based on the property’s income potential, rather than the borrower’s personal finances. The better a property can perform, the better your terms, from lower mortgage rates to higher LTV (loan-to-value) ratios and loan amounts. A high LTV means less money down, reducing the amount of cash you need to pay upfront. At Defy, we offer up to 85% LTV, meaning you can make a down payment as low as 15% of the property’s purchase price.
House Hacking
House hacking is a popular strategy that involves various methods to make money from extra space on your property. One of the most common ways involves purchasing a multi-family property, living in one unit, and renting out the others. However, it can also involve subletting a room or renting out yard space to be used as parking or for other purposes.
The rental income can offset mortgage payments, effectively reducing your housing costs and enabling you to save for future investments. This approach allows you to start investing with minimal funds while building equity.
Leveraging Owner-Occupied Loans
Owner-occupied loans, such as FHA, VA, and USDA loans, offer low down payment requirements for properties where the property owner resides in one unit. For instance, FHA loans may require as little as a 3.5% down payment, while VA and USDA loans can offer 0% down payment options for eligible borrowers. All three loan options may even offer closing cost payment assistance programs depending on the state.
These types of loans lend themselves well to the house-hacking strategies of renting out unused rooms or living in one of the units of a multi-family home while renting out the rest. However, keep in mind that FHA loans, in particular, prohibit short term rentals (STRs), or rentals that provide accommodations for less than 30 days. Homes purchased with VA loans and USDA loans are more lenient in this regard, but all three require you to meet livability standards and other criteria.
FHA lenders can also require borrowers to pass the self-sufficiency test to be approved for a multi-family home purchase, where they will have to prove that rental income from all of the occupants can cover mortgage payments.
Using Hard Money Loans
Hard money loans are short-term, asset-based loans provided by private lenders. These loans have few requirements and can be easier to be approved for. However, since they’re short-term, borrowers have less time to pay the loan and are often faced with higher interest rates due to the risk that hard money lenders take on.
This is why after rehabbing the property, investors tend to refinance into a traditional mortgage, repay the hard money loan, and potentially pull out additional funds for the next investment. This strategy is known as BRRRR (Buy, Rehab, Rent, Refinance, Repeat). In this strategy, the hard money loan is only temporary, used to quickly secure and renovate a property because of its ease of approval.
Hard money loans can come in the form of a lump sum of cash, or as fix-and-flip loans or construction loans where funds are disbursed depending on renovation or construction milestones. Fix-and-flip loans and construction loans often require borrowers to have a concrete business plan and submit an itemized list of renovations and features, detailing the value they can provide. This mitigates risk and allows for more favorable terms from the lender. Keep in mind though that not all lenders offer hard money loans.
Seller Financing
In seller financing, the property’s seller acts as the lender, allowing you to make payments directly to them instead of obtaining a traditional mortgage. This arrangement can be beneficial if you lack the funds for a standard down payment or have difficulty securing traditional financing. Terms can be more negotiable than with standard loan products and can be tailored to fit both parties’ needs.
Creative Financing
Creative financing refers to the practice of using unorthodox methods to gain funding for real estate investments. These can include everything from using non-QM loan options like bank statement loans and interest-only loans to financing arrangements like rent-to-own and crowdfunding.
The main goal of creative financing is to keep the amount of money you need to spend upfront to an absolute minimum, as well as to bypass the difficulties of securing a traditional loan. The underwriting requirements of a conventional loan can be a significant barrier if you have less-than-perfect credit or a high debt-to-income (DTI) ratio.
Partnering with Other Investors
Forming partnerships or joint ventures with other investors allows you to pool resources and share the financial burden of purchasing multiple properties. Each partner can contribute capital, expertise, or both, facilitating the acquisition of properties that might be unattainable individually. In these ventures, it’s essential to draw up clear agreements outlining each party’s responsibilities and profit-sharing schemes to minimize disputes later on.
The most affordable ways to partner with other investors are crowdfunding and joining investment cooperatives. These setups require the least amount of investment on your part, but it does mean you will also have to share the returns with a larger number of stakeholders, usually making them modest at best.
Private Money Lenders
Private money lenders are private individuals who provide loans based on personal relationships and trust, often with more flexible terms than traditional lenders. These can include individual creditors or even friends or relatives.
Private money lenders can be a valuable resource for financing multiple rental properties, especially if you have a solid investment plan and a track record of successful deals.
Building relationships with private lenders can open doors to funding opportunities that don’t require significant personal capital. Note that private money lenders are not to be confused with private mortgage lenders–private money lenders are usually private individuals, while private mortgage lenders are typically businesses.
Private Mortgage Lenders
Private mortgage lenders are mortgage providers that stand separate from traditional financial institutions. Since they’re not under the umbrella of government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac, they are not required to follow the usual regulations for lending criteria and loan terms. This gives them more room to negotiate with borrowers and create agreements that align more closely with their financial needs.
Defy is one such private mortgage lender, and this freedom to tailor our loan products is what allows us to offer fully customizable mortgages to cater to diverse lending situations.
The BRRRR Method: Build Your Portfolio Strategically
The BRRRR strategy—Buy, Rehab, Rent, Refinance, Repeat—is a powerful method for acquiring multiple rental properties with limited funds. Here’s a step-by-step breakdown of how it works:
Step 1: Buy an undervalued property that has the potential for improvement
The BRRRR method begins with acquiring a distressed or undervalued property that offers the potential for significant appreciation after renovations. Since this investment strategy often hinges on using financing methods that typically have higher-than-normal interest, investors seek higher returns to compensate.
As such, BRRRR investors target properties in undervalued locations that are anticipated to appreciate significantly in the near future. These include areas experiencing economic upticks and improvements to their infrastructure and amenities.
Step 2: Rehab and renovate the property to increase its value and appeal
Once the real estate deal is closed, the property undergoes strategic renovations to improve its functionality, aesthetics, and rental appeal. Investors typically focus on cost-effective upgrades that maximize property value, such as:
- Kitchen and bathroom updates
- Flooring replacements
- Curb appeal enhancements
- Structural repairs and mechanical system updates (HVAC, plumbing, electrical)
The goal is to complete renovations efficiently while ensuring the improvements justify a higher market valuation and higher rental rates.
Step 3: Rent out the property to generate a steady rental income stream
After renovations, the next step is to secure tenants and establish a consistent rental income stream. A well-renovated property in a desirable location attracts higher-quality tenants, reducing vacancy risks and ensuring stable cash flow. The key is to market properties competitively and favor long-term lease agreements to maximize potential income.
Step 4: Refinance the property once it’s stabilized
Once the property is stabilized and generating steady rental income, BRRRR investors typically refinance with a long-term loan, such as conventional loans or DSCR loans, to lower mortgage rates and extend the amortization period.
This step also allows investors to pull out a portion of the increased equity as the property should’ve appreciated in value following the renovations and regional improvements. Investors can then monetize this extra equity with a home equity loan, HELOC, or cash out refinance to fund their next investment or pocket it as profit.
Step 5: Repeat
With the refinanced capital in hand, investors can reinvest in additional properties, repeating the cycle to grow their real estate portfolio. Over time, this strategy allows for exponential portfolio expansion with minimal money upfront.
In essence, the BRRRR method involves fixing up properties with short-term financing, securing tenants, and then refinancing to a more manageable long-term loan. Once they’ve built up enough home equity, investors can leverage it in the form of a home equity loan or cash out refinance to fund their next investment, using as little of their own funds as possible.
The Benefits of Financing Multiple Properties
If you’re a new investor, you might be wondering: why take on the added risk of financing multiple properties at a time? Wouldn’t it be better to err on the side of caution and stick with one property until it’s been stress-tested and proven to be self-sufficient?
While that is a valid strategy and can be the best course for some, there are certain benefits to financing multiple properties that all investors can take advantage of:
- Diversifies your investments: While sticking with one property until it’s proven to be able to withstand market stresses can be a sensible thing to do, regardless of how much time you put in, it can still be impacted by factors outside of your control, like sudden local market downturns and natural disasters. Multiple spread out investments are less likely to be affected by negative economic factors all at once.
- Multiple income sources: By growing your portfolio quickly, you can reap the benefits of multiple sources of income early. On the other hand, with a single investment, you often have to wait a while before it can generate enough cash flow to pay off its mortgage and turn a profit.
- Build equity faster: Building up your portfolio quickly also means you accumulate equity quickly. Even if some investments don’t perform according to your initial projections, over time, you can build enough equity to recoup those losses entirely.
It’s also prudent to keep a certain margin of safety to mitigate the risk you’re taking on. The BRRRR method detailed above recommends only moving on to your next investment once the previous one has stabilized and been refinanced into a long-term loan.
How To Buy Multiple Rental Properties FAQ
How can I buy my first rental property with little to no money?
Strategies such as house hacking, leveraging owner-occupied loans, or partnering with other investors to minimize upfront costs can allow you to purchase your first rental property with little money of your own.
What are the risks of using hard money loans for property investments?
Hard money loans often come with higher interest rates and shorter repayment terms, which can pose financial risks if the property’s renovation and refinancing don’t proceed as planned.
Can I take out a DSCR loan even if I’ve taken on a lot of debt?
Absolutely. DSCR loans ignore most of your personal financial standing, and thus generally disregard your debt-to-income (DTI) ratio. Your credit score has to be above a certain threshold, but for most lenders, that usually ranges between 620 and 650. At Defy, the minimum credit score we look for is 620.
How does the BRRRR strategy help build a rental property portfolio?
The BRRRR strategy allows investors to recycle capital by refinancing renovated properties to fund additional investments, facilitating portfolio growth with limited initial funds.
Can I use an FHA loan to buy multiple rental properties?
FHA loans can be used to purchase multi-family properties (up to four units) if you occupy one unit as your primary residence, enabling you to rent out the remaining units.
What are common mistakes to avoid when using the BRRRR strategy?
Common mistakes include underestimating rehab costs, insufficient research, overpaying for properties, and failing to screen tenants properly. Poor budgeting can lead to cash flow issues, while unreliable tenants may cause vacancies or damages. Neglecting to do your due diligence on the location and other factors may result in your property stagnating, leaving you with insufficient equity to pour into the next investment.
Key Takeaway
While daunting, building a portfolio of rental properties with limited funds is achievable with careful, strategic planning, and by leveraging creative financing methods. Techniques such as house hacking, forming partnerships, and the BRRRR method can all be viable options to expand your real estate investments with very little cash.
There’s no one strategy that can be considered “the best”, as they each perform best in specific situations. However, many investors favor the BRRRR method for its ability to recycle capital and accelerate portfolio growth. It’s prudent for BRRRR investors to do their due diligence when selecting properties that have great growth potential, so they can gain enough equity to refinance and reinvest indefinitely, setting themselves up for limitless growth.
If you do decide to make use of the BRRRR method, keep in mind that the initial investment phases can be risky if you struggle to secure tenants or favorable refinancing terms. Thorough real estate market research is required to ascertain that a property is likely to grow in value enough to be profitable long-term.
Got more questions? Defy can answer them! Simply schedule an appointment with our mortgage experts on our website–we’ll happily point you in the right direction. Alternatively, you can call us at (615) 622-1032.
