Taking out a loan on property I bought with cash

16 Replies

I now own three properties, the last two purchased with cash and the first has a paid off mortgage.  The first was my primary and the next was my second home and the third is a multi family and I live on the first floor.   I alternately think about selling or renting one or both of the first two properties.  One thing I have not spent enough time considering is trying to take a loan to get the cash out, then renting.   Is this possible?  What type of loan?

Thanks.

absolutely. Leverage the free and clear properties to buy more. Then let the renters pay off your new loans.   I would contact a local bank for a commercial loan.

I'm not following.  If you are living in the third property, and you are thinking of selling or renting the first two properties, what are you now doing with the first two properties?  Are they vacant?

Why would you put the ones at risk that you already own outright?   Why not just take out a loan on a new property and let it take care of itself?  What is the difference aside from risking what you already have?  A bird in the hand is worth 2 in the bush as they say.    If anything, use the money from the other rentals to pay off the new one quicker or use that money to take care of any unforeseen issues that might arise. 

Originally posted by @Brian Mathews :

Why would you put the ones at risk that you already own outright?   Why not just take out a loan on a new property and let it take care of itself?  What is the difference aside from risking what you already have?  A bird in the hand is worth 2 in the bush as they say.    If anything, use the money from the other rentals to pay off the new one quicker or use that money to take care of any unforeseen issues that might arise. 

 Properties with 100% equity are more at risk than leveraged properties.  You have to ask yourself in either case what specifically is at risk...and how?

Originally posted by @Joe Villeneuve :
Originally posted by @Brian Mathews:

Why would you put the ones at risk that you already own outright?   Why not just take out a loan on a new property and let it take care of itself?  What is the difference aside from risking what you already have?  A bird in the hand is worth 2 in the bush as they say.    If anything, use the money from the other rentals to pay off the new one quicker or use that money to take care of any unforeseen issues that might arise. 

 Properties with 100% equity are more at risk than leveraged properties.  You have to ask yourself in either case what specifically is at risk...and how?

I think people try to make real estate investing more sophisticated than it really is.   I'm really not sure how 3 paid for properties are at risk if they are properly insured and she has half a brain on how to manage them by paying taxes, insurance, maintenance and upkeep.   By her owning 3 properties outright, she is obviously way past that and a very intelligent person.   I really don't know what her plan is by "leveraging" her paid for properties.   Lets say she borrows against her 3 and buys 3 more with cash and now owns those 3 outright, but owe's on the other 3.   What is the difference in just taking out a loan and buying 3 more?  Or worst case, you take out a loan on 3 properties to put a down payment on 3 more or however many more.   You now have 6 properties at risk should life happen as it often does.   Or Murphy moves into your extra room.   All you have to do is read through this forum on posts that people are in over their head because something happens in their life they didn't expect or they over leveraged, I hate that word.  It conjures of memories or riding a see saw when I was a kid .   I don't recall seeing a person coming on here with an issue because they own properties outright, only those who are *****leveraged******* or have borrowed too much. 

Thanks for the discussion here!   I learned something from every reply.   I am inclined to buy a fourth property, a three family, with a mortgage solely as an investment, and possibly a fifth (a townhouse) for my own use near family and roots.   To answer a previous question, my plan is to only live on the first floor of the three family I currently own, and the townhouse if I buy one.   Two of the houses I already own will be rented, I think.  Might sell if a good offer comes along.

 Here is a link from a blog that I wrote on cash out refinancing; http://www.biggerpockets.com/blogs/5110/blog_posts...

If you want to cash out on these properties. I would do it before you purchase more than one more property. You can only do cash out refinancing up to the first four mortgages, unless you meet the delayed financing guidelines.

Originally posted by @Kate B. :

Thanks for the discussion here!   I learned something from every reply.   I am inclined to buy a fourth property, a three family, with a mortgage solely as an investment, and possibly a fifth (a townhouse) for my own use near family and roots.   To answer a previous question, my plan is to only live on the first floor of the three family I currently own, and the townhouse if I buy one.   Two of the houses I already own will be rented, I think.  Might sell if a good offer comes along.

 You're doing just fine.   Probably better than 3\4 of the people on here.  Keep doing what you're doing.   You should be giving advice.   

Here is my opinion, and I tend to agree with @Joe Villeneuve on this one, you are more at risk by owning properties out right vs with a mortgage on each property. The whole question isn't just about cash flow in this case, but about liability and asset protection. Since you own the properties out right, consider moving them to a LLC, and to further add to your protection, establish the LLC somewhere like Wyoming or Nevada. Then, get a mortgage, basically a cash-out re-fi, against the properties. Since, they will be writing you the check, then you can use that as your down payment for your next property.

I can't fully do it justice, but I would recommend reading "The Loopholes of Real Estate" by Garrett Sutton.  

The whole basis is that if you get sued they can only go against the equity that you have in the property. If you own them personally, then they can go after everything. Also, by forming a LLC out of state, if I understand it correctly, they have to file suit in the state where the LLC is formed.

I would give that book a read & talk with a good lawyer before going much farther on this.  But, if you own three properties, I would definitely be renting out as many units as you can.

Best of Luck.

Originally posted by @Jesse Waters :

Here is my opinion, and I tend to agree with @Joe Villeneuve on this one, you are more at risk by owning properties out right vs with a mortgage on each property. The whole question isn't just about cash flow in this case, but about liability and asset protection. Since you own the properties out right, consider moving them to a LLC, and to further add to your protection, establish the LLC somewhere like Wyoming or Nevada. Then, get a mortgage, basically a cash-out re-fi, against the properties. Since, they will be writing you the check, then you can use that as your down payment for your next property.

I can't fully do it justice, but I would recommend reading "The Loopholes of Real Estate" by Garrett Sutton.  

The whole basis is that if you get sued they can only go against the equity that you have in the property. If you own them personally, then they can go after everything. Also, by forming a LLC out of state, if I understand it correctly, they have to file suit in the state where the LLC is formed.

I would give that book a read & talk with a good lawyer before going much farther on this.  But, if you own three properties, I would definitely be renting out as many units as you can.

Best of Luck.

 Also lousy legal advice.  There is a lot of it on the board this morning.

Kate, with three paid-off properties at risk, you can afford to get (and cannot afford not to get) competent legal advice from a Massachusetts attorney.

@Richard C.  So, how is telling someone to look into asset & liability protection by talking to a lawyer lousy advice????

No, that is good advice. The stuff about an out-of-state LLC is bad advice. And in general, people here (and this post) ascribes too much in the way of magical powers to an LLC.

If Kate is the sole operator of an LLC, and the fact that decisions are being made by her alone and work done by her is provable, that LLC will be very easy to penetrate.

To that point, I agree LLC's aren't all magical, but some protection is better than no protection. LLC's do offer a great deal of protection, especially if Kate could find someone to partner up with, even if they are just a 1-2% member. LLC's do vastly differ from state to state, and you should want to protect your self as much as possible. She could also layer her LLC's, hold the properties under different LLC's etc. Anything to add protection and slow down a legal attack.

Alot depends on the state, in SC a single member LLC is treated as a sole proprietorship and not granted the legal protections of a LLC, but a multi-member LLC (ownership percentage is not dictated) are granted full protections.

This is why I said go talk to lawyer.  Any corporate lawyer worth his salt should be well versed in this sort of thing & should be able to set it up pretty easily.  It also helps, at least for me, to go to my lawyers office with a general idea of what I want done. 

Thanks again! Discussion helps me sort through my questions! I happen to have an excellent lawyer here in MA so I know where to go for legal advice. I was mostly trying to understand loans, and what benefit there is to leverage and what risk. I have NO interest in an LLC. I know they are easy to penetrate. I expect to look into umbrella insurance, but last time I did I saw some things I did not like. My gut is not to have unnecessary debt, but I see some situations were it can help with moderate risks. I think it would be okay to have one leveraged property, which is the direction I am going. I am setting limits because I want to do the work myself, and I am approaching my happy limit.

With all the help here and sensing what works for me, here's the plan:

Take out a commercial loan on property #4, MFH, which will solely be an investment property.  Do not cash out properties already owned.   Pay cash for the townhouse I want to buy near family and roots, which is property #5.   I could reverse the order and buy the townhouse first, since I would like to rent out the first two SFHs and my current MFH and see how it goes before buying another investment property.  My current MFH is renting nicely, but I have work to do on the SFHs to get them ready to rent (mostly take my stuff out).   

One more thing......  the townhouse will be my new primary residence, so I am exploring getting a mortgage on that.

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