Struggling to release equity on a debt free SFR worth $350k

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Struggling to release equity on a debt free SFR worth $350k

Colin G Murphy
Investor · Tampa, FL · Member since 2010 · 263 posts · 159 votes

Hi everyone

At the beginning of 2013, two business partners and I pooled some spare company cash and formed an LLC to purchase a single family in a nice neighborhood of St. Petersburg Florida. We fixed it up a little and it has been rented to the same person for $2100 per month ever since. Our net rent is $1400 per month (insurance is quite high).

More recently we have been planning to purchase additional properties for flipping and for rentals and we decided to release equity on this SFR to help us do so. After going through all the motions with a local bank, we were offered a max of $75k, which came as a bit of a surprise considering the property is worth $350k with no debt.

The problem I guess was that the banks decisions were based solely on a debt service ratio of 1.3 and didn´t take into account the value of the property or our own personal income. We were hoping to release $200k or so, but that wouldn´t work for them as the mortgage repayments would be too high as a percentage of the net rent.

To summarize, it seems that our "problem" is that we want to release equity on a rental property that has strong appreciation (prices have risen a lot since we bought) but modest rental returns. 

Any ideas on how we can get $150-200k out of this property? I´d hate to have to sell it.

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  • Jim Sokoloff
    Real Estate Investor · Cambridge, MA · Member since 2014 · 52 posts · 15 votes
    12y

    You could approach a private/hard money lender, but you're going to pay rates that are a multiple of the conforming mortgage rates for access to the equity. You might be at 10-15% interest and several origination points.

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  • Jason Gorenchan
    Real Estate Lender · Green Bay, WI · Member since 2014 · 18 posts · 6 votes
    12y

    Colin,

    It sounds like conventional is a viable route for you, but you requested a loan on that property only and so they were only using that single property's cash flow. If you are looking to purchase another property with existing cash flow, ask your lender to do a blanket loan on both properties. Then you can use your existing property's equity, and the cash flow from both.  If you are buying a good property this should allow you to get in on another deal no money down at conventional rates. We do this all the time. Use a portfolio lender too, they are more flexible.

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  • Colin G Murphy
    OP
    Investor · Tampa, FL · Member since 2010 · 263 posts · 159 votes
    12y

    Great feedback - thanks a million!

    @doug_merriott: We will definitely reach out to Jason Hands.

    @sokoloff @lenval: Hard money is certainly an option, but I don´t think we have exhausted our conventional options just yet, so will put a bit more work into that. We have enough funds to purchase a couple of flips, but if I can boost our cash deposits with a reasonable equity finance on this property, I´m very keen to do it. 

    @jasongattristar: That´s a really relevant point. We have been jumping through the hoops with a portfolio lender who will hopefully be able to fund some new deals, and the blanket loan is a great option to have. I hadn´t considered that. 

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  • Raymond B.
    FL · Member since 2009 · 2k+ posts · 357 votes
    12y

    @Colin G Murphy,

    To make the @ work, do the following:
    Hold down the shift key and type @?
    Look below this Window, and you will see a list of names of people that have posted in this thread.
    Click on the name of the person that you want notified via an email, that you responded to them.
    If you are a Colleague with anyone that has NOT posted in the thread, and you want them to see your post, hold down the shift key, type the @ and the first 4 letters of their First or Last Name.
    Then look below this Window and click on that person's name.
    Raymond

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  • Joe Impagliazzo
    Real Estate Lender · Newport, RI · Member since 2014 · 182 posts · 33 votes
    12y

    @Colin G Murphy 

    Is the deed to this property in the LLC's name? If not you should be able to cash out 75% with a conventional loan as long as the DTI and credit scores work.

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    12y

    To me it sounds like the bank is doing their math wrong.  What are your actual expenses on the property?

    Let's say your expenses are 50%, just for easy math.

    $1,050 for debt service with a 1.3 coverage. Let's say the bank loans you money at 5% amortized over 25 years. They should loan you 138,000 @ 5% with a monthly payment of $806.73. Most banks allow 1.25 DSCR and some do 30 year amortization, so this would make your loan higher.

    To me it seems like they think your cash flow for debt service is about $569.97.  If that is the case on a free and clear investment of $200k-$300k you probably should sell it and look for something better.  

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  • Colin G Murphy
    OP
    Investor · Tampa, FL · Member since 2010 · 263 posts · 159 votes
    12y

    @Raymond B.  thank you very much for the tech tip, I´ll do it properly in future.

    @Joe Impagliazzo yes the property is in the LLCs name, which had a loss last year due to repairs and another condo we own which is currently vacant (we use it during business trips). 

    @Steve L. I figured the bank was doing something wrong initially but my business partner went through the numbers with them again on the phone afterwards and they came back with an offer of just $75k, maybe $100k at a push. Gross rent is $2100. The monthly overheads are taxes $340, insurance $333 and pool $100. Works out at $1427 net. The bank were quoting 6% interest over 20 years.  

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  • Joe Impagliazzo
    Real Estate Lender · Newport, RI · Member since 2014 · 182 posts · 33 votes
    12y

    @Colin G Murphy 

    Ok so if it's in the LLC the route they have to take to lend is probably causing the small loan amount. If you were interested in changing the deed to the personal names that would work, but not sure if your interested in that.

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  • Colin G Murphy
    OP
    Investor · Tampa, FL · Member since 2010 · 263 posts · 159 votes
    12y

    Hi @Joe Impagliazzo - appreciate the suggestion although I think we´d prefer to keep ownership in the LLC for now.

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