How do you finance a property with collateral?
Friends, I have a couple of rental properties, and two of them completely paid off. I am trying to find a way to leverage them to buy my first multi-unit property. It seems that everyone I’ve talked to wants me to refinance them and pull the equity out and use these funds as a down payment. I have some cash to put down as a down payment, but I really want to find a way to leverage paid off properties.
Is this even an option? How does underwriting works in this case? Would I have to look for more private investors vs. conventional organizations for the loan?
Any help is appreciated.
If the properties are in an LLC you may be able to find a local bank or credit union that will offer a business line of credit secured by multiple properties. It's similar to a Heloc in that you only pay interest when using the funds. The catch is that most funds used have to be paid back within a year, then the line can be renewed, so it's a very short term play. They would use multiple homes as collateral and take a first position lien against them.
I haven't completed a 1031 Exchange so cannot speak to the particulars...I have paid tax on the sale of my properties, and it bites. The 1031 is the tax advantaged way to "trade up" from several small properties into a larger property with the assistance of an accommodator.
I’ve done 7 sales (15 doors) and 6 purchases (53 doors) using 1031’s. They’ve worked out great. Do your homework and you may find they work for you also.
Talk to your local bank about an in house line of credit secured by a mortgage in 1st position. They will want yearly financials from you and the loan will have to be renewed annually in most cases, so be prepared to pay the entire balance each year if for some reason they non-renew. It's not the same as a fixed rate mortgage over a fixed term, but it does offer some flexibility.
@Oleg I. I am not entirely sure what you are trying to achieve based on your post, and then the following answers.
You are looking to keep the properties, correct? Is there a reason you would not want a traditional mortgage?
If you want to leverage your properties to get money to buy your first multifamily, the most straight forward way would be to take out a mortgage (refinance) them, pull the equity and use it as your down payment on another property.
As noted, you might be able to get a secured line of credit. The upside with this is you only pay when you have a balance outstanding. The downside is the rate will be floating, and likely higher, than a mortgage (but they are often interest only, so they payment will be less). And as Erik mentioned, they can be called or reduced at anytime, so you there is a chance, although it might be small, that your line is gone or reduced when you need it.
Thank you all for your feedback. It looks like i have some more homework to do.
@Oleg I. You could also consider getting a Heloc on your investment properties,
depending on you investing strategy going forward. Add that to your home work list.