Blue, and others smarter than I on RE investments,….
I’m looking for practical info on financing another rental property. As a sideline, I’ve been doing the landlord thing. I have a couple 4-unit properties in a college town. Market values have gone up, and I’ve made improvements, so I have a fair amount of equity in each one.
I’d like to buy my next place as a no-cash-out-of-pocket deal using my existing equity. I’m not sure the best way to tap into this resource though.
1) I could wrap all 3 into one new commercial loan, but the interest rate would be higher than I’m paying on the 2 existing ones now (nice low, fixed, 30yr mortgages).
2) I talked to a banker about a commercial line of credit. Looks like 9.00% (Prime + 1%) with closing costs of $2K. He says I could use the line as downpayment on a rental. The line would be a 2nd note on my existing mortgages, so I’m not losing my nice fixed low rates. I’ve never had a line of credit set up before, and am leery about it (don’t know why, really).
3) What other ideas am I missing?
The local enviromnmet is turning from a sellers to a buyers market right now, and I want to be poised to act.
Thanks!
Ithaca, NY “10 square miles, surrounded by reality”
Replies
Stray, I don't know that I'm smarter about real estate than you, or anybody for that matter, but I'll toss in a bone here.
Don't even think about re-financing away those nice low 30 year mortgages unless there's no other choice! Those low mortgages are like money in the bank and it would be shame that you ended up with higher rates and a longer term.
I would think you would be able to put a second mortgage on your properties if you have enough equity. I'm fairly certain that you could do a cash out refi up to at least 70% LTV. Check the papers for investment money. These aggressive lenders are looking to loan money to guys like you. They get slightly higher terms and they like the safety provided by the equity cushions. Most likely the money is portfolio money rather than bank money.
I think setting up your line of credit now is smart becauase when property values drop, you'll have a harder time getting the same amount of credit line approved. Already many banks are tightening up their lending standards because of the softness in the real estate markets. You might already be too late to maximimize your borrowing power.
At this point I'm personally very concerned about the real estate markets but I'm in Michigan and we've been taking some hard hits in the metro Detroit markets.
One good thing about a bad market is that it will open up more ways to acquire properties. Sellers of properties will be fielding less offers and it's quite possible that they will be much more open to a variety of creatively financed offers. It's not unthinkable that you could use your existing equity in your propertys as collateral on future purchases. All it takes is the right motivated seller hoping to unload his "problem".
blue
When you say check the papers for invetment $, I have a knee-jerk reaction to watch out for these types of outfits. Many are good to deal with I'm sure, and some are not so...
Obviously I'd get my own lawyer to look everything over, but do you have words of advice on weeding out the big fish from the sharks? Things that should make me go running and screaming away from their office?
I've never gone anywhere but a typical bank for funding before. Ithaca, NY "10 square miles, surrounded by reality"
When you say check the papers for invetment $, I have a knee-jerk reaction to watch out for these types of outfits. Many are good to deal with I'm sure, and some are not so...
Obviously I'd get my own lawyer to look everything over, but do you have words of advice on weeding out the big fish from the sharks? Things that should make me go running and screaming away from their office?
I've never gone anywhere but a typical bank for funding before.
Ironically, I've never went to a typical bank for any of my real estate ventures! LOL! I have used conventional financing on my personal residences.
My words of advice to weed out sharks is to explain up front what you are looking for: competitive interest rates, no prepayment penalty clauses, no exhorbitant junk fees and closing costs, etc. Tell them what you want and see if they have a program that meets your needs. Then, read the fine print.
Don't pay any upfront fees to get this type of basic information. If you do go ahead with a loan application, there will be costs: appraisals, etc. Those charges have to be competitive. Don't get rushed into anything. Explain that all closing documents need ot be available for your attorney to review them prior to the closing.
Once you do a deal with these alternative money sources, you'll have a relationship and it won't seem so scary.
It might help to understand where the money is coming from. Most of those advertisement are from firms specializing in non-conforming loans. These are loans that won't be sold on the secondary market to Freddie Mac and Fannie Mae. Sometimes the money is private money: wealthy professionals who have healty stakes in the market and want to diversify their holdings. What better security than a fourplex (income producing property) that has a 30% equity position at risk. Are you really going to give the property back because you are $3000 behind in mortgage payments, when you are risking $50,000 of equity? I'll loan you the money! LOL!
I would highly suggest tracking down a real estate investment club that probably operates in your county. Do a google search or REIA and you'll get linked up to clubs that operate near you. There are a lot of resources using these clubs to network. Some of the members are loan companies specializing in investment loans. You can meet other members that have had their deal funded by these same people. The best mortgage broker that I ever used was the President of our club. He was a vey nice, personable people person that was an expert in mortgages. His wife was nice too and together they ran a nice cozy mortgage brokerage business.
Don't rule out the companies that advertise in the papers without a little investigation. Some might be crooked but some might be just what you are looking for. Make an informed decision, not an emotional one.
blue
I agree with most of what Blue said. It really depends on what your current rate is though. An equity line of credit makes sense in your situation. Those closing costs sound a little high to me but it depends on your lender and your situation. You can refinance your new purchase later if rates warrant it once you get some cashflow coming in from it. I have done the same in similar situations and it worked out well by bringing in some income as well as establishing the credit line for future purchases. Dont mess with the existing mortgages unless you really crunch the numbers.
ccal,
My existing fixed rates Are 6.99% and 7.35%
I agree with you and Blue about not touching these if I can help it.
I guess one reason I'm leery of the line of credit is incurring closing costs before I know I even have a specific deal I want to pursue. I thought the closing cost was a bit high as well (but have nothing to base that on). There's also a $250 annual fee (waived 1st year).
Payments are interest only for first 5 yrs.
Maybe this is just the cost of doing business, and a price to pay to be ready to go at a moment's notice?Ithaca, NY "10 square miles, surrounded by reality"
I guess one reason I'm leery of the line of credit is incurring closing costs before I know I even have a specific deal I want to pursue. I thought the closing cost was a bit high as well (but have nothing to base that on). There's also a $250 annual fee (waived 1st year).
Stray, you are focusing one the costs, not the benefits. I know, I'm in the same boat on an arrangement I'm considering. The difference is that you are in the market for new investment propertys right now, I'm on hold trying to divest. I don't want any more properties right now!
You also should consider what you are trying to buy. If you are trying to pick up properties with an all cash, huge discount type offer, your upfront fees are necessary to back up your quick close offer. If you are purchasing more routine properties that will afford you the time to do a conventional closing, then you probably don't need to establish the equity line till you have an offer pending. Your only other concern would be if your credit history will be changing, ie. leaving a job/income. Get your credit approved before you jump ship.
blue
Blue,
As I've been thinking on it this afternoon, I really have no rational reason to distrust the private $ arena, and your last posts confirm that even further. I'll start searching around a bit locally and also look around for a club as you suggest.
I hear you about not focusing on the cost, but rather the benefits. I know I have to spend some $ to make $ (usually). On the flip side, I do anticipate that this would be in the "typical" RE deal, as opposed to some discount offer where speed may be more critical to be attractive to the seller.
I need to do some more digging around locally...that is clear.Ithaca, NY "10 square miles, surrounded by reality"