How does an individual gather 5, 10, 20, 50+ units of real estate?

Question

These people tend to tell that the key is to use capital that’s not your own – like from a bank. I understand how it works with common mortgage. But let’s say I already have a mortgage, thus own one property/real estate. Now I’m in debt towards the bank and they’re not giving me another loan to buy another flat since I need to be repaying the first one (?).

So, how does it work? Where do these people get the needed money to buy the second property? The third one?

In: Economics

Answer 1

When you get a mortgage, the bank just wants to be relatively sure they are going to be paid. When you purchase a second (or third, fifth, 18th…) home, they want to know if it’s a rental (I should hope it is!), the expected rent, and they want to know the chances of vacancy.

As long as it looks like it won’t be difficult to find a good tenant, the home won’t require major repairs (they will require an appraisal), and the market rent will cover the mortgage, the bank is generally pretty happy to loan the money to people with good repayment history.

In short, they won’t lend *you* more money to just buy additional houses to sit there empty or for you to use, because your income won’t support that… *But* if you are renting them out, that rent is now a part of your expected income.

You do need to have some money down on each one as well. What happens in many cases of multiple home owners is that they “leverage” their other homes. So let’s say they bought home #2 for 300k a few years ago with a 240k mortgage and it’s now worth 375 after some minor renos and market changes… they can try to use some of that additional equity as the money down for home #3 by borrowing against it. In essence, not actually needing any new actual money down.

While they keep adding up properties, many are over leveraging themselves and end up with very little equity in each property, but have decent cash flow from the rents collected. If property values stagnate or drop, those types of landlords tend to find themselves in a world of hurt… if values go up, they get pretty wealthy.