How to leverage 8 (paid off) single family homes?

1 Reply

BP Folks,

I am looking for some help. Please pardon my ignorance when it comes to the financing process as I am newer to it. I have learned that I want my cash on cash to be above 12% and I use the BP rental analysis tool (Thanks Brandon Turner). I am a buy and hold investor and plan to hold all properties for longer than 10 years. We have 8 properties they are paid off and I want to start using leverage but I want to keep my cash on cash above 12% by using conservative financing products. I also do not want to lever the total value of the properties above 50% (this will help immensely if there is another 2008 like downturn or any type downturn for that matter)(most conservative non-traded REITs like Blackstone use around 50% leverage as well) All 8 of our properties are very similar to this one example below.

Using 5% Vacancy, 7% Repairs, 7% Capital Expenditures, 0% Management (self managed) in rental analysis calculator 

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Property A (paid cash) Year 1

Purchase price: $80,000 Rent $1000/mo or $12,000 annual

Total Annual expenses $5,240

Total Annual cash flow $6,760

Cash on cash ROI $6,760/$80,000= 8.45%

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Property A (Traditional 30 year fixed, 25% down, 5% rate, $2,500 closing costs) Year 1

Purchase price: $80,000 Rent $1000/mo or $12,000 annual

Total Annual expenses $9,105.12

Total Annual cash flow $2,894.88

Cash on cash ROI $2,894.88/$22,500= 12.87%

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Property A (Alternative Lender 10 year, 25% down, 5% rate, $2,500 closing costs) Year 1

Purchase price: $80,000 Rent $1000/mo or $12,000 annual

Total Annual expenses $12,876.72

Total Annual cash flow -$876.72

Cash on cash ROI -$876.72/$22,500= -3.90%

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The one alternative lender I found does not make sense as it creates a negative cash on cash return. I could go the traditional financing route but I want to see if I can find a portfolio lender. My concern is isn't there a limit of 10 loans per person traditionally and don't they look at your debt to income which could become a bottle neck as you try to scale? I want financing to be done on like a business level as most of these properties have been held by us for multiple years now and ideally decent rates. Should I approach a credit union? I want to own 30 rentals with my buying techniques (as I find appropriate deals which that could take years) but I don't want to have to buy only 10 in my name then have difficulty accumulating others or use family members (How do we run this like a business?). I believe there are lenders that do it on a per property basis but I'm not sure their rates or terms. I'm looking for 30 year notes or maybe even 15 (15 would make cash on cash lower but also faster to pay off and financial freedom) I also have cash on hand and do not ever want to lever the total portfolio value above 50% as I mentioned before at most current valuations of the property. Hoping the BP community can guide me in the right direction. Any ideas are greatly appreciated. Please PM if needed. Thanks all in advanced!

Best,

Erfan Haroon

Hey Efran,

Since you are looking to scale, I don't suggest the conventional route because you will run into issues with your debt to income further down the line. That being said you are in luck, there is a rental loan product that you can get through an HML that fit your needs. It is a 30 year rental loan that does not require income verification and if you aren't looking to get max leverage and want closer to 50% the rates aren't too far off from what you would get conventionally. Another highlight is that you are able to keep the properties under an LLC so you can protect your assets by not having your properties in your personal name. Send me a direct message, would love to discuss more with you.