Cash out Refi to acquire multifamily units advice please!

9 Replies

Hello investors,

I am seeking some advice regarding jumping into multifamily units. i currently have 2 active rental houses paid for and clear. I am attempting to leverage one property with a cash out refi. I was planning on using it ( assuming I am approved) on another SFR in my area. However after much dwelling on the idea ( because I am new to this) , I wondered if I can cash out refi then use the money to as 2 separate down payments on 2 separate 4-plex units in the Lubbock Tx area. I used to live there and I remember the rental market was fairly hot at the time.

I guess here is where I need my advice, assuming I am approved - how viable is this idea ? Will a bank go for two 30 year mortgages on two separate buildings at the same time? I am hoping to get around $100,000 on the cash out refi. I was hoping to acquire two newer 4 plexes for around 180-185k each - using 50k down on both. 

I appreciate any insight- if there are any lubbock amigos out there- I would love to chat and see what your take is on this idea. thank you!

Howdy @Burt Gourley

You will actually have 3 new 30 year mortgages. Don't forget the Cash out Refinance mortgage. I would think as long as your DTI is acceptable through the process and you have cash reserves then it might not be a problem. Remember your Credit Rating will also be affected.

Alternatively, you could look into a single portfolio or commercial loan for both properties.

@Burt Gourley

Why not try to target a 10 unit? Buy one building/property instead of two?

A bank will give you 2 separate mortgages, but do you want 2 mortgages, or would it be easier to target one property?

Refi & Roll is the quickest way to wealth and scaling your portfolio

Gino

@Burt Gourley I don't see getting three loans impossible. I would seek recommendations for a broker or good VP at a bank. A good bank should look at the property first, the business second (if titled in an entity), and your personal as the third.

I had found myself in the past not doing certain things similar to this because I had questions about whether the bank would or would not do this. In the end, only the bank can really answer the question and the bank doesn't know your question until you ask them, so just ask them. If you find the right bank they should be glad that you want to do repeat business with them. I wouldn't want to establish a relationship where the bank told me "we are only going to do one".

Do you already have the other units you want to buy? Your question also sounds like you would be getting three simultaneously but in reality it would probably be a refinance (30 days or less), close on the first multi (30 days) and then close on the next multi (30 days). Depending on if the units were vacant or rehab was needed, this could be longer or shorter. Nothing eats up some money like 4 of your 5 units vacant. 

You would be wiser and far better positioned if you trade up. Sell the SFHs, rather than refinance, and buy a larger multi unit to increase your potential cash flow per door. In the long term you would be much farther ahead by scaling up the number of doors per roof that continuing to purchase/hold SFHs.

Moving away from SFHs sooner rather than later is the smartest move to scale up.

@Burt Gourley

Lots of good information here.  I would also recommend more units, but it seems you'll have to refinance the sfr to get the down payment.  On a portfolio loan, you'll need 25% down and in many cases, no income verification is required.

Food for thought

Congratulations and continued success

Stephanie

Let me thrown another option on the table for you to chew on ....

Sell the SFRs and 1031 exchange into a bigger multi unit. It is not always easy because of the timeframe you have to identify the like property and close the sale (90 days + 180 days). If you are going to jump into multi unit, why do you need to keep the SFR? By doing a 1031 exchange, you avoid paying taxes on the proceeds of the sale, assuming your 1031 is successful. Furthermore, if you can fetch 100k on a refi, I'm sure you can fetch enough down payment for a 10+ unit. Add this to the list of your options to look into ...

As long as your credit holds & your DTI works, should not be a problem to get all those mortgages.

I agree with getting rid of the SFR & going MFR though.

@Burt Gourley , @Henri Meli makes a good case as do several of the others.  But let me correct one thing on the time frames of the 1031.  From the day you complete your sale you have 45 days to identify your potential purchases.  You have 180 days from the date of sale to complete the process.  So that first identification window can feel a little tight.  

And it would also be fine to sell the two properties and do a 1031 on each into the same larger replacement property.  As a way to scale to a bigger asset it's a wonderful tool.

@Burt Gourley another thing to consider is the type of financing you'll be able to get on the properties.

If you stick with 4-plex units, you'll be able to get a residential type mortgage, and drag it out for a longer repayment term. If you go over 4 units you're into commercial loan territory, with higher/variable interest rates and shorter terms.

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