Paid cash for 5 rental properties. What now?

42 Replies

I have purchased cash 5 sigle-family rental properties in Texas (I live/work in New York).

The investment for all 5 properties together was of roughly $550,000. All properties are now rented, generating PROFIT of $3500 a month.

My goal is now to expand my portfolio of properties in the area, using the equity of these 5 propeties + OPM to purchase 10 (or maybe 15 other properties).

Any suggestion on how I should go get the money to buy all these other properties? I was thinking about giving a 20% down on each of them, but I don't know how to get the money (or the best place to get it from)

What type of mortgage and how to get it approved?

Thank you!

Lucas

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Originally posted by @David J. :
@Lucas Bonasio

$3,500 x 12 = $42,000

$42,000 / $550,000 = 7.6%

Personally, I would sell the portfolio and buy myself shares in a REIT if I wanted to get into the RE asset class and make a 7.6% return. Less risk.

Just cuious I know most investors look for a 10-15% ROI. But if the OP would cash out and refi the properties would that not increase his ROI to a fairly decent level?

thank you @David Jackson . I could have probably increased that ROI by using that $550K equity in 20+ down payments of $20K each on similar properties.

Nevertheless, I do intend to increase that ROI by using that equity as down payment for new properties. In this case do you agree that a cash out refinance would be the best option? What other option would I have to use leverage? How about a home equity loan?

Thank you!

I personally would cash out refi. Take the money, buy more cash, improve the values, to where when you cash out, you get your full investment back, and do it over and over.

with $550k, we could do some damage and return far more than $3k a month in the Chicago area; and build on it over and over. Curious, what made you choose Texas?

I took an initial 20k and have turned it into a 20+ year career and thousands of deals and interest in over 700 units and still counting!

I wish the best for you! Happy Investing!

@Lucas Bonasio I would add that now is a great time to lock in some long term loans on these properties. The low rates are amazing. If you take the money out paying say 5% on them, and put that money into properties where your CCR is say 10-15% even, you are earning double what your cost of funds is. Nice return.

So leaving the money in those Texas properties would be foolish at this point. Cash it out and get it moving..

@Lucas Bonasio I would do a cash out refi for sure as well. I'm not entirely sure what the current guidelines are as far as the LTV maximum for SFH on a cash out refinance goes. Last I checked (last year), I believe it was 70-75%.

Look into the underwriting guidelines as well if you're not familiar with them (DTI ratio, credit score, reserves, etc). Conventional lenders are pretty strict about NOT using the rental income towards your DTI unless you have 2 years rental history on your tax returns.

If that becomes an issue (which it was for me until this year), local small portfolio lenders are the way to go. They're a lot more lax on that rule. You won't get the 30 year fixed rate terms you're getting from a conventional lender though.

Hope that helps!

Ahhh, if only you had come to BP and asked us what to do with $550K before you bought (hindsight is a beautiful thing, huh?)!

So what made you pay all cash? I mean, I assume you had a reason. If you didn't want to leverage going in, then I'm just wondering if you would even consider refinancing as an option for you, even though it's your best and most obvious.

If you would consider leverage, then your other option is to take that $3500/month cash flow and save up a 20-25% down payment on your next house and start leveraging your properties from here on out. Snowballing your cash flow will allow you to purchase a lot more.

You may want to consider getting a Line of Credit (LOC) on some or all of the properties. I prefer using LOCs as I can pay them off and still have access to the funds instead of paying a mortgage and having the money disappear. I feel that I can better utilize my funds by collecting the rents, paying the monthly water & sewer bills and then putting all the remaining cash to pay down my LOC to lower the interest expense. Yes I will have repairs and to pay taxes and insurance once a year but instead of that money waiting for repairs in a money market account earning 0.5%, I can pay down extra on my LOC saving me 5.5% in interest expense. Since it is a LOC, I can pull that money back out should I find another property to buy or expenses come up.

You do take more interest rate risk with LOCs as you're not locking in for 30 years but you also get the money when you need it instead of cashing all of it out now and hanging on to it until you find something to buy. You can even use the LOCs as down payments for new mortgages if you wish.

You're starting out ahead by having them all paid off so you might want to consider keeping that advantage close by instead of giving it up already.

Thank you for the info *********** . I'll definitely try to go for the cash out in on of those properties (to get the ball rolling).

Correct me if I'm wrong: I could get up to 70% of the value that the property is appraised for. Let's say that equals to $75K. That means I could use that money to acquired 3 other properties of similar value with a 20% (or $25k) down payment, right? And in that case I would be paying 4 mortgages at the same time: the original house I refinanced + the 3 new ones.

And if I do it right, this should have a positive impact on my cash flow (even if it's a modest one), correct?

That is one impressive story you got... $20K to 700+ units... Wow! Congratulations! I wish I could get there one day... :)

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Thanks for the tips @Mehran K. . Unfortunately I think I fall on that category you described as "not eligible" to use the rental income to pay for the mortgage, since I've only owned the properties for less then a year. In that case I would have to wait until I have been renting them for 2+ years, right?

Is there any way out of that problem? I now you suggested going to smaller lenders, but I was really interested in the 30 year fixed rate...

Any other suggestions? Have you ever considered a LOC as suggest above?

Thank you!

I have a HELOC on my primary residence, not any of my rentals. Although the monthly payments will be lower if you get "interest only" payments on your LOC, you'll still have to qualify for the loan via the same typical underwriting guidelines mentioned above.

Personally, I didn't want to wait the 2 years, so I went straight to portfolio lenders and never really used all my 1-4/10 conventional loans. Another option is to take on a credit partner that will put the cash out refinances in their own name (assuming they can qualify). You'll be giving up something though.

@Lucas Bonasio - we were able to "skip" the 2 year rule. We bought the property in Aug - put it on that year's taxes and were fine the next October for a loan with 25% down and 1 year reserves vs the normal 6 months.

That's fantastic @Brianna S. Thank you very much for the insight! Just to see if I understand: you were able to secure a cash out refi where you got 75% of the value of your rental property as cash to reinvest, correct?

I have 3 of my properties ranted since June 2013, and they do show up on my taxes for 2013. So hopefully I should be able to do the same thing as you did as long as I have enough cash in my account to cover 1 year of mortgage payments, right?

Also, I know you are based in IL, and my properties are in TX, but do you mind sharing who you got the Cash out Refi with?

Thank you!

@Lucas Bonasio you will find Texas is a little harder now to do cash out refi. I tried on mine and was unable to due to the price of the home and the requirement of % of closing costs. I have excellent credit and cash reserves but it was a no go. At least for conventional loans. You may be better off. I don't know the value of your homes, but you may have issues if they are valued less than 100k.

70% of appraisal is typically the max you can get. Looks like you have your 6 month seasoning on some of them....some places will require 1 year, but many will be OK with 6.

Thank you for the sugestions @Sharon Tzib .

I think the main reason why I chose all cash was that I was to scared of debt in general (not really decerning between good and bad debt - something that I do now...and BP definitely helped)

My goal is now to increase my cashflow by increasing my portfolio, as I feel more confident a knowledgeble about leverage (though still a rookie here...)

Waiting to save the amount necessary from my profit to make a down payment on my next property, definitely feels like a solid move. Unfortunately, time is of the essense for me - since I don;t want to miss the May to July "move-in period", and get stuck with a mortgage and a vacant home. So the cash out refi or the HELOC would be my only options here.

Thank you!

Lucas

@Lucas Bonasio

@Ryan Steele

Ryan is correct in that we need to know how the properties are titled. A quick search found your Texas LLC, so if they are title in the LLC you won't be able to get the 30 yr Fannie loans everyone is pushing you towards. you may be able to refi and retitle at the same time to get these but Fannie won't finance in the LLCs name.

One suggestion is rather than a cash out refi (which requires a closing and new title insurance) you could find a portfolio lender that will let you pledge your equity in the properties (usually up to 80% or so) as collateral for the new purchases. My lenders let me do this to access equity for new pruchases. The end result is a 100% LTV portfolio loan on the new purchase with the equity in one of the free and clear properties pledged as collateral for the loan.

There is so much push on this board for conventional (Fannie) financing that the benefits of commercial/portfolio loans are often over looked. In my opinion, once you go commercial you never go back. The flexibility, speed and ease is so much greater than a conventional route.

Originally posted by @David J. :
@Lucas Bonasio

@Ryan Steele


There is so much push on this board for conventional (Fannie) financing that the benefits of commercial/portfolio loans are often over looked. In my opinion, once you go commercial you never go back. The flexibility, speed and ease is so much greater than a conventional route.

Agreed!

Thank you @David J. , *********** and @Mehran K.

I do own an LLC in the state of Texas. But all my properties are under my name. This is because I created the LLC after I had purchased the properties and, since it's a sole proprietorship, I decides not to spend the money in transferring the titles to the LLC, since that would bring to tax benefits to me.

In this case, since the properties are under my name, it should be able to get a Fannie right?

Nevertheless, do you think that a commercial loan would be a much better option as to justify the investment in transferring the titles to my LLC and then apply for the loan? If so, why?

Thank you very much!