Good Debt Vs. Bad Debt

In the book Rich Dad Poor Dad, the author writes about his rich dad, who is someone that understands the game of business. He also writes about a poor dad who is a teacher that works really hard and doesn’t understand the game of business, which is passive income versus earned income. If I were to sum up everything I learned, it would be this: passive income is a way to earn money and earned income is not the way to earn money. The second thing I learned is all about good debt and bad debt.

rich dad poor dad

Fear NOT!

There are many options for you to get funding for your next property. Before we get into that, lets talk a little about good debt and bad debt.

In the book Rich Dad Poor Dad by Robert Kiyosaki, he explains it very well.

Bad debt: Takes money out of your pocket

Good debt: Puts money into your pocket

For example, some bankers will tell you that your home is an asset, because you have equity and you live in it and don’t pay rent. In the bank’s eyes, it is an asset when you have a mortgage on the house, because they are making money off of you from interest. For you, that house is a liability, because you aren’t making anything off of it — you are paying for it.

An asset puts money into your pocket, and a liability takes money out of your pocket. If you buy a house and you have a renter in there who pays the mortgage and expenses and puts money in your pocket, that is an asset!

It was so difficult to buy my first rental property. There was so much fear and anxiety in my mind and a lot of “what if’s”. It was difficult, but once I got past all that, I saw how passive income and good debt brought money into my pocket.

An Asset Vs. Liability

Asset: Puts money into your pocket

Liability: Takes money out of your pocket

The home that you live in is a liability because it takes money out of your pocket every month. A rental property is an asset because it puts money in your pocket every month.

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We are going to talk about this today — finding financing for more properties so you can build your business faster. For my business, I’ve grown it big enough that I’ve paid off most of the mortgages. I have about 35 properties, give or take, and I buy and sell all the time. Out of all of those properties, I think I have four notes, because there was so much money coming in from my rental properties and I was able to pay them off. I wanted to get rid of those debts so I could make more money every single month.

As we look at today’s session of finding financing for more than four properties, keep this idea in mind — passive income and good debt will bring money into your pocket every single month. You want to utilize someone else’s money, so you can earn passive income. You can dramatically grow your business with mortgages.

Types of Financing for More Than 4 Properties

Recently, an investor named Chad asked me, “How do you find financing for more than four properties?”. That’s a great question! I hit a road block at four properties as well. Most banks won’t worry about giving you conventional mortgages for up to four properties, but when you have five or more, how do you find financing for those?

It’s actually not as hard as you might think, but there are a lot of roadblocks. Once you get above four properties, you are looked at as an investor and there is different criteria to get another mortgage, because of the risk. If you buy ten properties at one time and you get ten mortgages from one bank, they are going to look at how much leverage is spread across and how much paperwork and administration they will need to do and they won’t look at it as being very favorable.

Even though it is hard to find financing for more than four properties it is possible. Let’s look at your options.


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Option 1: Freddie Mac

Your first option would be a Freddie Mac loan. They have an investment property mortgage program that allows you to finance up to six one- to four-unit properties, including your primary residence. You get a few more properties than your normal four, but you must meet strict criteria including:

  • Providing details of your monthly expenses for your personal residence
  • Having a minimum of 720 credit score
  • Paying a 15 percent down payment for a one-unit property and as much as 25 percent for a two-, three-, or four-unit property
  • Your debt to income ratio cannot exceed 45 percent
  • Having at least two months reserves of principle, insurance, and taxes for each property
  • Not accepting any gifts from relatives or anybody else outside of yourself to purchase the property. It needs to be your money that is seasoned, which means it has been in your account for the last two months

Option 2: Fannie Mae

Fannie Mae is another government-run institution for mortgages. They have the 5-10 Properties Program that allows you to finance up to ten properties at the same time. They have strict criteria as well, including:

  • Paying at least 25 percent down for a one-unit property and up to 30 percent down payment for two- to four-unit property
  • Having a minimum of 720 credit score
  • No late mortgage payments in the last 12 months
  • No bankruptcies or foreclosures in the past seven years
  • Two years of tax returns to show rental income for your properties
  • Six months of reserves for PITI (principal, insurance, taxes, interest) for all properties

Go to Fannie Mae’s website to find out more about their loan program or talk to your local mortgage broker.

Option 3: Blanket Mortgage

A blanket mortgage is more like a commercial loan over multiple properties. For example, I went to one of the big banks and asked about a commercial loan for two or three properties. I had four properties that were owned free and clear, I paid cash for them, and I said I wanted to bundle up four properties into one one loan and get all the money out in one lump sum and have notes on each one of the properties. The bank had each property appraised to make sure there was enough loan to value and they went through a lot of the criteria that Freddie Mac and Fannie Mae uses. They also made sure my rental properties were not in my name, but that they were in my company’s name.

When you get a blanket loan, it must be in your company’s name because it is a business loan. The good news is that it doesn’t fall back on you if you default (hopefully you don’t!), it goes on your company’s credit. All four properties had one loan on them, but it was broken down so if I wanted to sell one of the properties, I didn’t need to sell all four of them. To get a blanket mortgage, you will need to call up companies and see if they do commercial lending for multiple properties and get to the commercial lending division.

Warning: Blanket mortgages offer a number of restrictions and pre-payment penalties that you need to watch. They also have numerous release clauses. Every single mortgage that you get, make sure you read everything!

Option 4: Portfolio Loan

If you get turned down for the other types of mortgages, it is not the end of the world! You can try for a portfolio loan. These are offered by small, private banks like credit unions, financial firms, or groups of investors and they lend their own money. They don’t shop out and sell off the mortgage. If you get a mortgage through Bank of America, they will get everything initialized, but they won’t actually lend you their money, they will lend you somebody else’s money and take care of the whole process of the mortgage and make money on that transaction.

A portfolio loan is the bank’s loan. They are holding that loan and earning interest from your payment. To get one, talk to your local bank or credit union. They don’t usually require the same strict criteria as other loans. You need to make sure the bank you are going to be working with understands your business model and understands that you make money from these properties and that you make your payments on time.

Option 5: Friends and Family

Once you’ve built up four or five properties and you have a track record, there might be friends and family that are interested in loaning you money. Since I have built up my business and have been successful, I have so many people who have told me to call them when I need an investor — both friends and family.

Now that you have a successful business and you are making money, think about how you can show them how successful you are and use it as leverage to ask “Would you like to partner with me in buying more properties?”. Wait until you have a really good deal and you’ve exhausted all other options.

If you have a deal and already have the financing set up through Fannie Mae or Freddie Mac, talk to your friends and family. Show them the numbers and what they stand to gain if they partner with you. You can show them what your current portfolio is doing and what you are making in passive income.

Option 6: Seller Financing

Seller financing is financing from the people you are buying the property from. Let’s say you find a great deal and it is your eighth property. If all of the other options aren’t working out, you can go to the seller and ask if they would consider seller financing. If interest rates are 3.5 percent, you can offer them 7 percent interest and if you do not pay them, the seller gets the property back.

There are many ways to set up seller financing. I have a course on no or low money down, and seller financing is one of the ways I go over. If you want to learn more about this type of financing, go to www.masterpassiveincome.com/courses to learn more. If it is closed down to new students, sign up for the waiting list. Once it opens back up, you will receive an email.

Option 7: Hard Money Lenders

Most people think of hard money lenders as Jimmy-the-Wolf who will break your kneecaps if you don’t pay him back. Hard money lenders are definitely not like that. There are hard money companies out there that lend hard money. Hard money is short term, from one to five years maximum, because they want to turn money over quickly. It has higher fees and points, so you might be paying five points for the mortgage, instead of one or two with a mortgage lender (one point equals one percent of the loan). A good deal with hard money is still a good deal. You can always refinance afterward. It is so much easier to refinance after you have the property, because the bank can see that it is performing.

If you would like to ask me a question that I may answer on this podcast, go to www.masterpassiveincome.com, and at the top you will see the About button. When you hover over that, it will say Ask Dustin, and you can write me an email there. I personally answer every single email I get about real estate from my students, podcast listeners, and people who read my blog. I will definitely answer your questions and maybe even showcase your question on the podcast.

As you are building your rental property business, you may get into a position where it is hard to get funding for more properties after your first four properties.


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How to Get Funding and Financing for More Than 4 Properties as a Real Estate Investor
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