Is this a good strategy and how could i improve it???

Question

Hi bp, my whole strategy for my real estate investment portfolio was to gobble up as many homes as i could in the next 2 years.  These homes would be free and clear ( i already have 8 free and clear now) and producing 10% to 18%  returns..so my cash flow would be great.  By that time i should have accumulated around 15 to 20 income producing properties in the portfolio.  My next plan was to find a bank that would give me a line of credit against some of the properties i own and then i could continue to buy homes and use the banks money while paying down the LOC from the income my properties are producing in the portfolio.  I really prefer a line of credit instead of trying to get individual loans per property. (And i haven't found to many banks willing to make loans on investment homes in my area which is Orlando).  Im not looking to to be super rich i just want to continue to invest and have fun doing it.  I also like sleeping at night knowing that i have little to no debt and i do not wish to leverage my shirt off to get a ton more.  Small steps for me will keep me happy.  Any other ideas how i could improve or change this strategy for the better???  Thanks for the help!!!!

David Beard · Answer

If you have good credit (720+), have been at this for a couple of years at least, and have solid income outside of real estate, why wouldn't you go ahead and do 70% LTV conventional cash out refinances on four of your highest priced properties?  Rates are ridiculously low at sub 4% for 30-yr fixed.  Yes, you'll have closing costs, but the breakeven on paying back these closing costs from your incremental profits (from buying new rentals) is typically less than a year.  Yes, you'll get a bunch of cash at one time and won't be able to deploy it overnight, but the interest expense will again be paid off very quickly from the profits on the new properties you acquire.

For cash out refi's, where there is no appraisal target, make sure that you meet the appraiser and politely provide them some favorable comps, highlight the improvements you've made to the property and the amenities in the area, and give them an idea of the target value you're looking for.

Issues with LOCs are that they're floating rate, and the undrawn portion can be unilaterally reduced or eliminated by the lender at any time.

Mike H. · Answer

I think its a great idea. If you can afford to pay cash for properties and are buying up as many as you can, you're ahead of the curve.  I agree with the previous poster that I would try to lock in as many conventional loans as you can though since its basically free money.

Aside from that, you should be sitting pretty when the price points return to normal and you own a boatload of houses.

The only other downside I see is that you're not getting to take advantage of having someone pay down the debt and/or the interest deductions.

But if you end up owning 20 or so sfh's free and clear, you'll be able to retire pretty comfortably at more than a substantial income.

Michael X. · Answer

I like your style Nigel  Dixon.  Your investing approach is a lot along the lines of what I am doing.  I'm currently working with local community banks to continue funding new acquisitions.

Here is what I have encountered:
Banks really like my rental bottom line.  Very little debt and high cash flow.  One requirement is that you have to be in business for at least a year.  This is sort of a stumbling block but they are helping out with what they can.  It will be a lot more after a year.  However, it is enough to fund new purchases just not at the pace I would like.

I'm currently trying to build credit in the LLCs name.  This is very important to me as I think it shows a well rounded company.  I'm pushing for credit cards and lines of credit.  So far I have been pretty successful.

One of the current banks I'm working with is offering to loan against individual free and clear houses based on the cash flow with pretty good rates.  I would rather have that type of loan on a case by case bases just because my goal is 10 free and clear SFH before I move to larger multi units or large NNN commercial.  I will borrow the money then use all of the rental cash flow to pay it down.  Is that the best strategy?  Depends on what you want.  I like free and clear SHF that I can keep or roll into larger properties later down the road.  Good luck!

Hope that helps

Dion DePaoli · Answer

At the end of the day how you leverage your assets is up to you either individually or in bulk.  Including the points made above how many assets you want to encumber as well as any additional guarantees the lender wants you to make might help you make your decision.

You should be able to find a local bank that is willing to discuss it with you both even in Orlando.  You have 15 to 20 free and clear properties I am guessing the banker might even buy you lunch.

Bill Gulley · Answer

A LOC, blanket future advance loan is a good way to go if you have the horsepower.

Be aware that such financing can easily dry up, so have an alternative at all times, especially as you cross the line at 4 to 10 houses.

Is this a good strategy and how could i improve it???

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