“How the heck did you do that Kevin?” That’s a question I would get over and over. Here I was, this 20 something year old kid telling people I had a rental portfolio of 55 rental units. How do you get 55 units when Fannie Mae and Freddie Mac cuts you off at 10 financed properties? There are some advanced strategies that real estate investors implement to acquire large cash flowing real estate portfolios. I want to discuss with you three different ways that I see real estate investors build gigantic portfolios without the challenges of limitations on number of financed properties.
One Loan For Multiple Houses
One strategy that I have utilized with success is what I call a blanket loan. A blanket loan simply means one loan secured by multiple properties. For me I had three free and clear properties and I wanted to pull cash out. I was able to go to my local bank and they gave me one loan secured by all three properties to give me the cash that I needed. My CPA lists this loan against one of the three properties on my tax return. When I apply for a new loan and they look at my tax return, they see one financed property. The other two show up on my tax return but there’s no interest expense so there is no debt on those other two properties. Although technically all three properties are financed, a blanket loan is one single loan reported against one single property. I implemented this pretty simple strategy on just three properties, but it is common for banks to finance larger portfolios with one loan. Finally, blanket loans are a commercial product, not a normal residential loan. Oftentimes you will need to personally guarantee these loans, but they do not show up on your personal credit report.
To take the blanket loan a step further, you can combine the blanket loan strategy with a C corporation and completely eliminate these properties from your tax return. The way this works is if you own properties in a C corporation, the C corporation pays taxes on the income those properties produce and files its own tax return. That income belongs to the corporation, not you. You can withdraw the income from the C Corp by either taking a salary or dividends on any stock that you own in that company. It is possible for you to own 100% of the stock and issue dividends anytime you want. The downside to this strategy is double taxation. The corporation is going to pay taxes on any income at the corporate level because it files its own tax return. All income in the C corporation will be taxed and then any money distributed to owners through a dividend will be taxed on that person’s personal tax return. Income in a C corporation, if taken out through dividends, will be taxed twice. You could take money out as a salary which will be a deductible expense to the corporation. In that case, you will only be paying taxes on the income on your personal tax return. The big benefit to a C corporation is any assets or any income that is earned by that corporation stays in the corporation. They do not show up on your personal tax returns. The reality is the corporation owns the assets, not you personally, so when applying for a loan, you would disclose your ownership in the corporation not what the corporation owns. No real estate or the number of loans will be reported on your tax return.
The final way to grow your real estate portfolio without being limited by the number of finance properties is to use owner financing. This was my primary strategy to build my portfolio and although I did implement the blanket loan on those three properties, the majority of my portfolio was built using lease options and other owner carry financing strategies. If the owner is carrying the loan for you, it would be unusual for them to report that debt on your credit report. It is also unusual to have an owner ask you for a loan application or have guidelines or restrictions on the number of properties you can own. In fact, in all the owner carry deals I have done over the years, I have never once been asked to see my credit report to or to fill out an application. Because there is no guidelines or formal underwriting process with an owner carry, you could do this over and over and over again. This is a fantastic way to grow a gigantic cash flowing real estate portfolio.
One bonus strategy that we have seen used by successful investors is to move from single family homes to multi family. Simply buying a 4-plex allows you to buy four rental units with one single loan and you would still qualify for conventional money. This might be the easiest way to build the number of rental units you own.