Your Quick Guide to Financing a Large California Portfolio
- Conventional financing from Fannie Mae and Freddie Mac is generally capped at 10 financed properties per borrower.
- Portfolio loans and non-QM products like DSCR loans are designed to bypass this limit for serious investors.
- Understanding alternative financing and lender requirements is key to successfully scaling your real estate investments.
What is the Fannie Mae 10-Financed Properties Rule?
For many ambitious real estate investors in California, the Fannie Mae 10-financed properties rule represents a significant growth barrier. This regulation, established by the Federal National Mortgage Association (Fannie Mae), limits an individual borrower to a maximum of ten residential properties with outstanding mortgages. Freddie Mac, the other major government-sponsored enterprise, has a similar guideline.
This rule was implemented as a risk management strategy. Lenders view an investor with a large number of mortgaged properties as having a higher risk profile. By capping the number of loans they will purchase from a single investor, Fannie Mae and Freddie Mac limit their exposure in the event of an economic downturn or a default.
It's crucial to understand that this limit applies to financed properties. If you own 15 properties but only 8 have mortgages, you could still potentially qualify for two more conventional loans. However, once you have ten mortgages reporting on your credit, you have reached the conventional lending ceiling.
Why Am I Getting Denied for a Conventional Loan on My 11th Property?
Receiving a denial for your 11th investment property can be frustrating, especially if your credit is excellent and your income is strong. The denial isn't a reflection of your personal creditworthiness. It's a simple matter of policy. The vast majority of lenders, from large national banks to local credit unions, originate conventional loans with the intention of selling them to Fannie Mae or Freddie Mac. This process replenishes their capital, allowing them to issue more loans.
If your loan application doesn't meet every single guideline set by these entities, including the 10-property limit, the loan is considered non-conforming. This means the lender cannot sell it on the secondary market. To avoid getting stuck with a loan they can't sell, they will simply deny the application outright. You have effectively graduated from the world of conventional financing and must now explore solutions designed specifically for seasoned investors.
What Are Portfolio Loans and How Do They Work for California Investors?
A portfolio loan is a mortgage that a bank or lender originates and keeps on its own books, or in its own "portfolio," instead of selling it. Because the lender is not selling the loan to Fannie Mae, it is not bound by Fannie Mae's strict underwriting rules, including the 10-property limit.
How Portfolio Loans Bypass the 10-Property Limit
Portfolio lenders create their own internal guidelines for risk and eligibility. They have the flexibility to look at a borrower's complete financial picture, including the performance of their existing rental portfolio, their liquid assets, and their experience as an investor. This holistic approach allows them to approve loans for borrowers who are otherwise highly qualified but have simply outgrown conventional lending limits.
Key Features for California Investors
For investors in high-cost markets like Los Angeles, San Francisco, or San Diego, portfolio loans are an essential tool for expansion. Here are their defining characteristics:
- Flexible Underwriting: Lenders can make common-sense decisions based on the deal's strength rather than a rigid checklist.
- Relationship-Based: These loans are often offered by local California banks and credit unions that value building long-term relationships with successful local investors.
- Focus on Cash Flow: A portfolio lender is more interested in the cash flow generated by your entire portfolio and the potential income from the new property.
- Customizable Terms: Terms, rates, and fees can sometimes be negotiated, especially for investors with a strong track record and significant assets.
Example: An investor in Sacramento owns 11 rental properties and wants to purchase a 12th. A local community bank offers a portfolio loan. They review the rent rolls and profitability of the existing 11 properties and determine the investor is in a strong financial position. They approve the loan based on the strength of the investor's portfolio, not a rigid property count.
Can I Use a Blanket Mortgage to Finance Multiple Properties at Once?
Yes, a blanket mortgage is another powerful tool for investors looking to scale. This is a single loan that covers two or more properties. Instead of juggling multiple individual mortgages, you have one lender, one monthly payment, and one set of terms.
Pros of a Blanket Mortgage
A blanket mortgage can be used to purchase a new group of properties or to refinance several existing properties, consolidating debt and potentially pulling out cash for future acquisitions.
- Efficiency: One application and one closing process saves significant time and administrative hassle compared to financing each property individually.
- Strategic Refinancing: You can consolidate higher-interest loans on several properties into a single, potentially lower-rate loan.
- Release Clause: This is a critical feature. A release clause allows you to sell one of the properties from under the blanket mortgage without having to refinance the entire loan. The sale proceeds are used to pay down a predetermined portion of the principal balance, and the remaining properties stay mortgaged.
Example: A California investor holds a $3 million blanket loan on five duplexes in Orange County. They decide to sell one duplex for $800,000. Per the release clause, they use $600,000 of the proceeds to pay down the blanket loan's principal. The loan balance is now $2.4 million, secured by the remaining four properties.
Cons of a Blanket Mortgage
- Higher Requirements: Lenders typically require a lower loan-to-value (LTV), meaning you'll need a larger down payment (often 25-30%).
- Complexity: The underwriting process can be more involved, as the lender must evaluate the financial viability of every property included in the loan.
Are DSCR Loans Exempt from the 10-Property Limit?
Absolutely. Debt Service Coverage Ratio (DSCR) loans are one of the most popular financing options for real estate investors, and they are completely exempt from the 10-property rule. DSCR loans are a type of non-Qualified Mortgage (non-QM), meaning they do not have to adhere to the strict consumer protection rules that govern conventional loans, including property limits.
Understanding DSCR Loans
The core principle of a DSCR loan is simple: the property's income must be sufficient to cover its debt obligations. Lenders qualify the property, not the borrower. This means you do not need to provide personal tax returns, W-2s, or pay stubs. The approval is based almost entirely on the rental income the property generates.
How DSCR Calculation Works
The lender calculates the DSCR using a straightforward formula:
DSCR = Gross Rental Income / PITIA (Principal, Interest, Taxes, Insurance, and any Association Dues)
Most lenders require a DSCR of 1.25 or higher. A ratio of 1.0 means the income exactly covers the expenses, while anything above 1.0 indicates positive cash flow.
Example: An investor wants to buy a rental property in San Jose.
- Projected Monthly Rent: $5,000
- Monthly PITIA: $3,800
- Lender's DSCR Requirement: 1.25
Calculation: $5,000 / $3,800 = 1.31 DSCR
Since 1.31 is greater than the required 1.25, the loan is approved based on the property's cash flow. The fact that the investor already owns 20 other properties is irrelevant to this calculation.
What are the Reserve Requirements for Financing Over 10 Properties?
When you move into portfolio and non-QM lending, lenders need to see that you have sufficient liquid assets, or reserves, to weather potential vacancies or unexpected repairs across your large portfolio. Reserve requirements are significantly higher than for a primary residence.
While rules vary by lender, you can expect the following:
- Subject Property Reserves: Lenders will typically require 6 to 12 months of PITIA payments for the new property you are financing held in a liquid account.
- Portfolio Reserves: In addition, the lender may require you to have a certain percentage (e.g., 2% to 6%) of the total unpaid principal balance (UPB) of all your other financed properties in reserves.
Example: An investor is buying their 15th property. The new property's PITIA is $3,000 per month. The total mortgage balance on their other 14 properties is $5 million.
- Subject Property Reserve (6 months): 6 x $3,000 = $18,000
- Portfolio Reserve (at 4%): 0.04 x $5,000,000 = $200,000
- Total Required Reserves: $18,000 + $200,000 = $218,000
These funds must be in liquid, accessible accounts like checking, savings, or a brokerage account.
How Can I Find Lenders in California That Specialize in Large Portfolios?
Finding the right lender is the final and most critical step. You won't find these loan programs advertised during the Super Bowl. You need to know where to look.
- Work With a Mortgage Broker: This is the most efficient path. An experienced mortgage broker who specializes in investment properties maintains relationships with dozens or even hundreds of lenders, including those that offer portfolio, DSCR, and blanket loans. They act as your strategic partner, matching your scenario with the lender best equipped to handle it.
- Contact Local and Regional Banks: Community banks and credit unions are often the primary source for portfolio loans. They have a vested interest in the local California economy and are more willing to build relationships with local investors.
- Network with Other Investors: Join local Real Estate Investor Associations (REIAs) in California. Networking with other successful investors is an invaluable way to get direct referrals to lenders who are proven to be investor-friendly and capable of closing complex deals.
When you're ready to scale your real estate portfolio beyond the conventional 10-property limit, you need a lending partner who understands investor-focused financing. Explore your options with our specialized portfolio and DSCR loan programs. Apply now to take the next step in your investment journey.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including real estate investors looking to expand their portfolios beyond conventional limits. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for seasoned investors and first-time buyers alike.
References
Fannie Mae: Investment Properties Eligibility
Consumer Financial Protection Bureau: What is a non-qualified mortgage?
