Q: I’m a retired engineering executive. I’m building a second career owning rental real estate houses. I have an 800+ credit score and own several properties that are debt free, although I have open lines of credit on them.
What I typically do is buy a new house with cash from one of my home equity lines of credit, rehab the property and then rent it out. After the property is rented, I try to get a mortgage.
Lenders seem not to want to talk to me because I have more than four properties. Is there anything I can do? I would like to build up to 15 rental properties.
A: When the market began tanking last fall, Fannie Mae and Freddie Mac changed a long-standing rule that has hit investors like you smack between the eyes: They limited the number of properties you could own if you were trying to buy or refinance a mortgage to a total of four from a total of 10.
Here’s an explanation of why that happened: When you buy residential real estate as an investor, you buy these properties for the rental income, appreciation or other business purposes. Some lenders would consider you a commercial investor in residential real estate. At some point, the residential loan market says to investors like you, you own too much real estate, even if it’s residential real estate and you need to secure your loans from commercial lenders.
As many loans have soured to investors in residential real estate, the standards changed and residential real estate investors were forced to find loans from commercial lenders.
But as the residential real estate market has soured, those same residential standards for loans are causing additional problems for the residential market. So, to help strengthen the market, the standards for residential loans were changed to allow individuals to obtain loans for multiple homes they owed and to even include residential properties that were rented.
So, the rule was rolled back. You should be able to find a lender who can refinance your property as long as you own no more than 10 properties at the same time. The 10 properties would also include your primary and any vacation properties you own. In addition, the rules may limit the amount of financing for each of the properties, depending on the type of property, your credit score and several other issues.
Once you own 10 properties, you’ll have to get creative about how you fix and finance future investment real estate or seek out financing for those properties from commercial lenders.
Jan. 19, 2009.