To pay off or buy more

[Andrew P.]

Hi all, I just started a real estate company and we are up to 8 units. What is the better way to make money and expand, pay off existing mortgages sooner or acquire more properties?

[Mike Makkar]

@Andrew P., the magic ingredient is LTV%. This is the metric, that lets you borrow with the highest leverage. If you can find a bank who will let you borrow up to 85% of loan to value, you begin to acquire properties much faster. Then you pay this off quickly (15 yr amortization) and then once you're at 75% get back and refinance back to 85%. Banks lend to 85% for the most stable of loans, virtually bullet-proof income history (Debt service coverage ratio of 1.4 and higher) and great liquidity. Otherwise, most commercial loans are at 75% LTV.

I can share a spreadsheet with breakdown of relationship between LTV%, property discount %, gross rent multiplier % and interest rates/terms. In my view LTV% and the ability to leverage has the greatest bearing.

As far as how you would do it, would be exercise the LTV through a cash-out refinance or a line of credit, that would generate the acquisition capital to buy more properties.