Different financing scenarios...... help me brainstorm.

[Mary M.]

I am sitting on some capital that I would like to invest. I also own some property that is free and clear. In total I have 10 units... It is new and higher end. CAP rates are 5 - 5.5%

I am trying to understand what my next moves could be....  I am in learning mode...     I know some will say pull equity and invest. I am trying to understand where the line is - how much to leverage and what types of loans would be best.  I am in talks with the local banks and they will help me but the loan terms are a nice low int rate (4.8) but steep prepayment and 25 yr amort with a 5 year term.   To me it seems that a Freddi Mac Small Balance loan might be better  (?)as I get a longer amort and longer term (plus maybe int only for a bit?)

Can someone walk me through the benefits/issues with each and anything else I should research? 

My goal is cash flow (my RE pays my salary/lifestyle) and of course long term appreciation and stability. 

also, as an aside - how do people make money doing BRRRS? is this a long term play to build larger wealth from a smaller starting point?

Thank you.

[Tyler Kastelberg]

@Mary M.

You're on the right track asking about the differences in bank debt and non-recourse debt. See a few differences below:

Bank

1) Easy to get -- most local banks will be happy to give you a loan on a high-valued asset with good cash flow

2) Recourse -- you'll need to personally guarantee that the debt will be repaid

3) Rates -- interest rates are typically a few basis points above non-recourse debt

4) Flexibility -- local banks can tailor a financing solution to your needs

5) Cost -- low cost, few fees

Non-Recourse "Commercial" Debt

1) Hard to get -- must have liquidity and net worth satisfactory to the agency lender

2) Non recourse -- you *technically* are not held liable for the outstanding balance if the loan defaults

3) Rates -- interest rates typically fall a bit below that of local banks

4) Flexibility -- not much ... your deal must have a minimum occupancy and have adequate operating history

5) Cost -- more than a local bank, and fees will need to be paid before loan approval

You can find a term sheet for Freddie's small balance program here: https://mf.freddiemac.com/product/sbl.html