First Deal Financing - HELOC or Commercial Loan?

Multi-Family and Apartment Investing
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First Deal Financing - HELOC or Commercial Loan?

Alejandro Rivera
Real Estate Investor · Jacksonville, FL · Member since 2017 · 7 posts · 0 votes

I have a contract on my first multifamily commercial deal. The property is a six unit 2 bedroom 1 bath apartment building. It is currently fully occupied (month-to-month). It currently rents for (average) $500/month per unit but there is room for improving the property. The plan is to redo floors, cabinets, paint and bathroom tile with the goal is to raise rents to $650/month per unit which I feel should be possible for this area.

I have talked to a portfolio lender and the terms they are able to offer are 6%, 15 year amortization and 5 year term with 30% down down payment.  

I also have the possibility of buying the property outright using a HELOC from my primary residence at a 4% interest rate. This would allow me to reduce the negative cash flow during the renovation period and while I re-tenant the building (I will not be renewing the current tenants contracts after the purchase to do a full renovation).

Then after the property is stabilized I can "refinance" the property or rather get a loan on the property that (hopefully) will have gained some appreciation and repay the HELOC.

I would be interested in knowing what more seasoned investors would recommend in this case. Since I have not done this in the past, one question I'd have is how easy/hard would be to get that loan 12-18 months from now on the renovated property and whether the terms of that loan would be more favorable for a property that I already own (vs. now that I am trying to buy).

Any insights are greatly appreciated.

Alejandro

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Dan Schwartz
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
9y
@Alejandro Rivera I'd take the financing you've been offered, not the HELOC. 1) if you don't have the HELOC already, it could take 4-6 weeks to get it. 2) unlike refinancing from hard money to conventional money (as in a BRRRR), your rate is substantially the same now vs after renovations. 3) the work you need to do on the units shouldn't cause more than one month vacancy. 6 x $500 = $3000 total vacancy loss. Your should be able to carry that. Meanwhile, get the HELOC anyway, but save it for a property on which you can't securing financing upfront and need to rehabilitate prior to getting financing. My two cents. Good luck!
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  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    9y
    @Alejandro Rivera I'd take the financing you've been offered, not the HELOC. 1) if you don't have the HELOC already, it could take 4-6 weeks to get it. 2) unlike refinancing from hard money to conventional money (as in a BRRRR), your rate is substantially the same now vs after renovations. 3) the work you need to do on the units shouldn't cause more than one month vacancy. 6 x $500 = $3000 total vacancy loss. Your should be able to carry that. Meanwhile, get the HELOC anyway, but save it for a property on which you can't securing financing upfront and need to rehabilitate prior to getting financing. My two cents. Good luck!
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  • Alejandro Rivera
    OP
    Real Estate Investor · Jacksonville, FL · Member since 2017 · 7 posts · 0 votes
    9y

    Dan,

    Thanks for the 2 cents. I'd say  your comments are worth at least $20 ;)

    I think that having the HELOC as a backup, for repairs or for when that great cash deal comes along makes the most sense as you suggest. I appreicate it. Sometimes you need to hear it from someone else as a new investor. Sure, the monthly payment are higher at 6% but the tenants are paying. My short term goal is to aquire 3 more small appartment buildings in the next 18 months. I am sure the HALOC will come handy.

    Best,

    Alejandro

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  • Kristina Heimstaedt
    Real Estate Agent · Newport Beach, CA · Member since 2017 · 259 posts · 293 votes
    9y

    I'm going to counter @Dan Schwartz and say go for the cheaper money. 

    1. If the seller is cash flowing or you don't need to cooperate with their 1031 exchange, get the cheaper money.

    2. The whole point of refinancing after you've repaired the property is to pull all your cash back out of the property to use for a future property. Get the appraiser in there post renovations and get a much higher value than when you purchased the property and go repeat the process.

    3. I agree that the time frame to get all of this work done shouldn't take long, but having a HELOC instead of more expensive money will take the time pressure off and allow you to focus on improving your product rather than finishing the job to refinance and get cheaper money.

    I'd calculate the difference in payments. I'd consider the savings from the HELOC as money that you could invest into the property and get a higher return rate because you put in nicer finishings with the extra cash.

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  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    9y
    @Kristina Heimstaedt what a refreshing dissent from what I've been seeing all too often here in recent days! Without more info, I think both ways are valid. I'm biased because we just went through a 10-week, sit-on-them-every-day line of credit opening. So I'm concerned about that timeline vs the potential to miss the opportunity to purchase the property. But my experience won't be his experience and maybe the HELOC is already open. We don't know! Also unknown is the amount of money needed for purchase. Weighing against the loan-from-the-start plan I put forth is a) a 50% higher interest rate and b) that the HELOC likely has interest-only payments. Again, we don't know for sure. But if this is a $100,000 loan, the carrying costs (50% more interest + principal paydown on 15-year am) are going to be much different than if it's a $400,000 loan. I'm all for buying on HELOCs and even calling it "cash" for an advantageous purchase price. But if this deal is over $100,000, I'd probably still just finance once and move on to the next deal.
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  • Kristina Heimstaedt
    Real Estate Agent · Newport Beach, CA · Member since 2017 · 259 posts · 293 votes
    9y

    @Dan Schwartz I appreciate the sentiments and I agree that there are reasons and money for almost anything. I think that I might be biased in working in Southern California. More often than not, my clients are looking at properties 700k minimum and when you're talking about a difference of a point or two on a loan for 500k, I look and think that that's my car payment. 

    I think I also answered this with the impression that there wouldn't be money leftover for the next deal. I'm of the opinion that when you use lower interest, it allows you to set aside your funds for more deals with the hope that you can make that happen as opposed to tying up all your funds in a single deal. 

    Bottom line, @Alejandro Rivera has excellent options no matter which direction he chooses to go.

    1Reply
  • Alejandro Rivera
    OP
    Real Estate Investor · Jacksonville, FL · Member since 2017 · 7 posts · 0 votes
    9y

    Thank you Dan and Kristina for your comments.  I appreciate both perspectives and that is what it makes the BiggerPockets community so great.

    I have come to understand that there is not a size fits all answer for everyone and it depends on both financial and personal factors.  

    The loan is for $160K on a $220K purchase price. I do have the HALOC in place (it took about 4 weeks). I do want to conserve "cash" for down payments and repairs of at least 2 properties in the near future.  This is why Dan's comments seem applicable.  I admit that I had been struggling with the decision of which way to go since there is definitely more cost all around going with the Bank loan.   

    However, by going with the loan, this lets me keep the cash to buy another day since I am in a portfolio building mode at this time.  I hoping that the time will come where my financing options will be wider. Right now I feel that cash conservation is most important for where I currently am in the journey.

    Alejandro

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