Equity line of Credit on multi-family property?

Question

Hey guys I'm new to all of this, so bare with me.

My family partnership (of which I am a 25% owner) owns a 7-unit apartment complex in Southern California free and clear. Value of the property is somewhere between $2.5m and $3m.

My questions is, can we get a line of credit (similar to a HELOC) against that property? It's a simple question but it has been hard to get a straight answer.

My parents live off of the cash flow from this property so they are not interested in taking on a standard 30 yr mortgage, as that would effect the cash flow, and thus their livelihood. My thought was that a "HELOC-style" line of credit would allow us to pull out only a fraction of the debt (and thus only effect the cash flow marginally) to acquire other income generating properties free and clear. We would then essentially BRRRR the new properties, pay back the line of credit and hopefully do it again and again.

Any ideas or suggestions would be welcome.

Thanks,

John

John Weisbarth · Answer

@Greg Dickerson thank you for the response, and glad to know something like this exists out there. I talked to a local mortgage company in my town and the agent had never heard of anything like that, but admittedly she didn't specialize in commercial property.

@Lien Vuong I really like the advice of getting some "face time" with local lenders at a local bank. I know just where to start now, so thank you very much.

Nick Schoch · Answer

If you know you're going to use it, then as a banker I would expect you to accept an unused fee. The unused fee would be applied to the average unused/available balance for the trailing quarter. I would expect the unused to be at least 0.25%.

John Weisbarth · Answer

@Nick Schoch great insight, thank you!

I have been perplexed as to why it has been so difficult to find this type of loan product against a fully paid-off, cash flowing asset like the one our family partnership owns, but now I finally understand the lenders perspective.

It seems like an important factor (among several) for the bank/lender is to trust that the investor will actually use the line of credit. Might it help if I came to the lender with a sort of business plan or timeline for deploying the funds? Other than a strong existing relationship (which I don't have yet), what would help persuade you if you were the lender?

John

Nick Schoch · Answer

I posted this response to a similar question here:

An investor property line of credit is definitely harder to find than a mortgage/term loan. They generally do not come with terms as friendly as a Home Equity Line of Credit (HELOC).

When I sold and underwrote these types of facilities at a large regional bank, we generally limited the offering to strong relationship clients. Even then, we would charge unused fees to ensure that we collected enough income so the deal made sense. Lots of investors like having the capital available and never use it. Consequently, they never pay interest. This is great for the investor because they pay only if they need it. No so great for the lender who still has a commitment and isn't collecting interest. The bank still has to reserve capital for the potential usage and it costs them money.

The downside for the investor is that most lenders limit the term on their lines of credit between 12-36 months. This means that to renew the facility, the borrower must go through the underwriting process every 12-36 months. Depending on the size of the loan, this could mean paying for new third party reports like an appraisal. Some lenders streamline this process, but it can still be a hassle. You can mitigate the appraisal/third party costs by providing a negative pledge on the would-be collateral property and getting an unsecured line of credit. This may be only available for high net worth individuals with strong balance sheets.

Ultimately, I would call around to local banks and credit unions to see if they have an offering. The less standardized the loan product, the more variance you will see in offerings. As such, calling around will get you the best deal.

Matt Clark · Answer

@John Weisbarth our local credit union offers a commercial line of credit that is collateralized by commercial property; that might be an option for you.

John Weisbarth · Answer

Thanks @Kyle Ransom for the feedback. In this situation there is no 75% owner, but rather four 25% owners. As you said it has been difficult to find a commercial lender to offer us a "line of credit", but I am still looking.

Kyle Ransom · Answer

I am not aware of HELOC for commercial real estate. If you owe less that 50% percent of the value of the property and you owned it for more that 12 months you can do a cash out refi or a second. However the 75% owber would have to be the borrow and have the credit and financials to do it. Lender is general will be more open to to doing a low LTV cash refi then doing a second.

Lien Vuong · Answer

Yes you can - bank will look at the property as a 'business', basically analyzing it's income/expenses and the actual valuation of the deal and will work with you to get the amount you're looking for. Typically you can go in with an x amount in mind or you can get up to 80% of the value of the property out in a Line of Credit.

Target a local bank who knows the area well and establish some relationships with the lenders in their office and go from there.

Greg Dickerson · Answer

Yes you can get lines of credit secured by the property. Your best bet will be your local commercial banks. Make sure to shop a few as they all have different requirements and offer different rates.

You will need to will need to qualify and they may require all the owners to sign and guarantee the loan.