Moving from SFH to Apartments

18 Replies

Hey guys,

I'm not a newbie anymore! I have 3 investment properties and I am looking to expand in small apartment buildings. I have been doing my research I wanted to tap the community about non conventional financing ideas.

I am aware I can refinance the houses and use the money as a down payment on the building. However, what I want to know are there any lenders out there that will take one or more of my houses as collateral (I currently own all 3 properties outright) and give me a full loan to purchase an apartment building? Is that something that is done or am I making this up in my head?

Furthermore, if anyone that can name lenders that do this in MI and/or TX that would be awesome.

Thanks!

@Dennis Perry , hi and welcome to BP!

So it sounds to me like you're going to try to refinance 3 SFHs and pull out enough cash to purchase a small MF properties outright without getting a new loan on that property, correct? If yes, then yes that's doable and is done often. The loan against your three SFH's would be a "blanket" loan that is collateralized by the equity in the 3 properties. Be aware that lenders often won't go above 75% (maybe 80%) LTV when doing cash outs. So you'll have to add up the amount currently owed on those and subtract that from 75-80% of their total appraised value to determine how much cash you will receive.

Example: 

SFH A, owes $30,000. Appraised $100,000.

SFH B, owes $110,000. Appraised $220,000.

SFH C, owed $85,000. Appraised $170,000.

Total Appraised value: $490K.  Total owed: $225K.

$490K * 80% LTV = $392K, less $225K payoff of old loans = $167,000 to go shopping for your first MF property. Keep in mind you'll be paying appraisal & closing costs for the refinance as well. Probably around $1,500 or so per property. Subtract that out of your available cash as well.

As you can see, you may end up still having to get a first position mortgage to purchase the MF in addition to the cash out you receive.  Without knowing your precise numbers, it is hard to give a specific example.

Happy hunting.

@Erik W. Thanks for the reply Erik!

The method you discussed is definitely one of my options. Right now, I would like to consider it my plan B.  However, I think my question is this scenario below possible? I'll try to use numbers close to my own. 

SFH A: Owes: $0. Appraised 110k.

SFH B: Owes $0. Appraised 85k

SFH C: Owes $0. Appraised 85k

8 unit commercial property (CP) selling for $400,000.

I would like to get a loan the covers the full $400,000 from the bank and offer SFH A as collateral and the down payment on the CP.

Does that make sense?

@Dennis Perry , congrats on having 3 fully paid off properties!  

For your $110K house, you will likely need to do a cash out refinance at 80% LTV, so that will give you $88K to put toward the down payment on your 8-unit. That should do it, if you can get an 80% LTV first position mortgage on the 8-unit. The down payment will need to be 20% of $400,000 purchase price ($80K), so you'll have just enough to cover that plus closing costs on the SFH refinance and the 8-unit. Commercial/MF unit appraisals cost more than a SFH, so don't be surprised to pay between $1500 - $2000 for just the 8-unit appraisal. Then add in closing costs, etc. and you might walk away with a few extra bucks to plant new flowers at the 8-unit.

You can cross collateralize houses depending on the lender however, the ones that I know who offer that service are nowhere near 80% LTV on the additional collateral properties- Also if the properties appraise for under 100k that will further limit the number of lenders willing to take a look at this type of deal

Hey @Dennis Perry

Yes many alternative lenders like us do this typically. But the catch is you must own the property free and clear. If that's what you mean by "owning the properties outright" then you're good to go. Would love to help you on this project if you'd like!

You may want to be careful about offering up all 3 SFRs for collateral. 

A lender will take them all as they want the max protection they can get, but what if they really only need two for cross-collateraliztion? They may not tell you that!

@Dennis Perry
Why not just sell one of your SFR and use that as your down payment for the 8-unit? If you do a 1031 exchange you can avoid paying capital gains. I would suggest finding a 5+ unit where you can add some value to the project. Whether that is raising the income, lowering the expenses or both. Once you raise the value of the building then you can refinance, pull money out and put long term debt on the property.

Originally posted by @Dennis Perry :

@Erik W. Thanks for the reply Erik!

The method you discussed is definitely one of my options. Right now, I would like to consider it my plan B.  However, I think my question is this scenario below possible? I'll try to use numbers close to my own. 

SFH A: Owes: $0. Appraised 110k.

SFH B: Owes $0. Appraised 85k

SFH C: Owes $0. Appraised 85k

8 unit commercial property (CP) selling for $400,000.

I would like to get a loan the covers the full $400,000 from the bank and offer SFH A as collateral and the down payment on the CP.

Does that make sense?

No, this won't work, but doing what Erik said will. You could also do a line of credit them. If the SF cash flows, then put a long term mortgage on them that will maintain good cash flow. With those loans, you now have a nice down payment to buy a larger building.