BiggerPockets

I know the laws have been changing, but just a few months ago you could still do 90% cash out.

You could also take out a HELOC, take out a loan based on your assets. Some lenders want you to put up a property as collateral.

Im sure some other members will help more, but that is the basic.

HELOC rates are pretty low right now, probably better than cashing out IMO.

Thanks for the responses guys. I ask with regard to buying/holding rental properties. How exactly can equity be used/applied with this approach.

Thanks,
Fred

We always called the use of equity in currently held properties to buy new properties "the shell game".

We will start simple. For explanation purposes I will make the math easy. Let us say that your bank's rule is that they will give you 75% LTV (Loan to Value ratio). That means that the bank will give you 75% of the appraised value of the property. Let us also assume that by some odd coincidence, every property you want to buy appraises at $100k exactly (again to make the math easy).

For the first purchase, you negotiate a savvy deal and are able to purchase the property for $53k. Add $2k in closing cost and $5k in rehab costs to round you out at $60k. That means you now own a property you have invested $60k in that is worth $100k (as appraised). You have 60% LTV. You decide to hold it and look to buy the next one.

Low & behold, you find another property that appraises for $100k. You negotiate to buy it for $73k with $2k in closing fees and $10k in rehab costs for a total of $85k. But, the bank will only give you $75k (75% LTV) so you are $20k short. Where do you get the $20k? In our example, you have the bank put a 2nd lien on the 1st property for $15k (bringing that property to a 75% LTV) and you cough up $5k out of pocket.

This is how currently held property can be used to buy new property.

Of course there are a number of assumptions used in the above, which are covered by me and others in other posts. Such as: (1) Will banks lend 70% LTV, 75% LTV, 80% LTV, or even 90% LTV? The short answer is: expect 75% LTV or less in this market. Also, (2) banks are giving 75% LTV of the appraised value OR purchase price, whichever is LOWER. This also cramps the style of new investors. It does not, however, affect the shell game. In fact, this is where the shell game shines. The difference being, of course, the initial cash needed for the initial property.

Rather than me going on and on, hit us with other questions and either I or others will try to give a better answer.

I see -refinancing raises your LTV and directly has a negative effect on cash flow. Unless the purchase price is so low (50% or less of market value), doing these refi's can be dangerous. Is that pretty much correct? Also, do HELOC's differ from this?

I guess the specific point of my question is -what are some methods that rental property investors use with regard to expansion (other than owner financing, sub 2 deals, opc)? Waiting until cash flow generates income for further down payments?

I also can access a fair sized business LOC (which can be used to purchase, then finance conventionally). But even here, if I only can finance up to a percentage of the properties value, that means I have the remaining percentage (with a significantly higher interest rate!) tied up into this property. That does not seem like a good idea!

I know these questions are extremely amateur, but I greatly appreciate the responses.

Thanks,
Fred

Fred,

When I want to buy another rental, I simply go to my small local bank and get the money. I usually don't buy and then refi later, because you have multiplied your loan expenses by 2. I just do it once and am done with it.

Every time you buy a rental property right, that should improve your financial picture. For example, let's say that at the time you buy your first rental, you have a net worth of $100,000 and $10,000 in the bank. You buy a $100,000 (market value) rental for $60,000 and it cash flows $100 per month. So, now when you go to the bank to buy your next property, you have a new worth of $140,000, your $10,000 in the bank; and your yearly income is $1,200 higher than it was last time. With the third rental, your net worth would be $180,000, you would still have your $10,000 in the bank, and your monthly spendable income would be $2,400 higher! Buying the rentals right increases your net worth and cash flow position. The more you buy, the better your financial condition and the more attractive you are to the banks.

Mike

If you are buying right, that is a great idea to purchase more property with no money out of pocket. Using the simple numbers above lets assume every house you buy is worth 100K. Lets also assume they will cash flow properly at 80K. Using the LOC you can purchase the property with cash and close more quickly, hopefully reducing your offering price. Lets say you can buy the property for 60K. That comes off your loc. The next day you go to your local bank and say you want to do a refi. They say they can refi for 80% of apprised value. You can now pull 80K out of that property, paying off your LOC, covering any closing costs, and puting some cash in your pocket for the next purchase. Mike is right, you should never pull money out of a property if it will reduce the cash flow to a level you are no longer comfortable with. Even in the above example the property would only cashflow at 60K you can take out a mtg for 60K paying off your LOC and only having to pay the closing costs out of your own pocket. By doing this you avoid having to pay a 20% down payment saving you 60K X 20%= 12K. This is why it is important to buy property with equity in it.

Do banks typically do an 80% refi of purchase price or appraised value (I thought purchase price)?

Mike, are you saying that because you've purchased your property at a tremendous discount, that your bank will loan you the full purchase price? Can you expand on this?

Thanks!
Fred

wow, interesting. So what should my response be when a bank tells me they require a minimum of 10% down?

Ohhh Mike. You are scratching me right where I itch..
This question has been on my brain for ages and you answered it vangloriously! Thanks dude :groovy:

As a soon-to-be 1st time homeowner, do you recommend ONLY smaller local banks? You mentioned that you go to smaller local banks and get better rates than Mr. Whale @ the Bigger Bank USA.

Can you provide a some input (for us rookies)of how to go about finding the smaller local banks by state? Online link? Do you recommend going to the local bank in the city that the house is located in or do you just use 1 or 2 that know who you are and what you do?

Im asking these questions b/c I'm shopping for a loan currently and want to waste as little time as possible in getting what I want.

Jugantic

" The more you shoot, the more you score and the LESS you lose. You cant win if you dont shoot the ball!"
-Micheal Jordan

When talking to a lender, would a normal first question be: " Do you offer investor loans based on the LTV" ?