One Commercial Loan or Two HEL

2 Replies

Currently, I have two small starter homes that are paid off. In order to expand my portfolio, I am looking to use their equity to purchase more properties. Going by the 70% LTV ratio, I will be able to pull out roughly about 100K. These homes are in great condition and will be kept indefinite.

From a financial standpoint, if the interest rate on both types of loans are even, would it be better off to just take out one loan since it would be less of a hassle?  Since some lenders have a maximum limit of ten loans, does this approach sound solid?

Look at the terms. You can go to the consumer side of a small, regional bank in your area and possibly get a HELOC or fixed rate term loan on both properties you have at 80% ltv with little closing costs. If you go the conventional loan route, then you have the full closing costs, appraisal etc and 75% ltv but a 30 year fixed rate. I like the helocs because you can advance the lines as needed to spend, either on repairs, taxes, capital improvements or acquisitions....then rapidly pay down the heloc with excess cash flow while still being able to access it again as needed. But you have to requalify every 5 years or so and the rate typically varies although there are some fixed rates out there...especially when banks have sales. You start aggressively paying down a term loan, you can't access that equity again without refinancing it. But, you typically get a fixed rate and 5 - 30 year terms depending on the bank and your needs.

Your other option is to to to the commercial side of this small, regional bank and look at a portfolio loan.  You can bundle your two properties, get 75-85% ltv loan.  The term will typically be 5 year term loan or line of credit, preferably fixed rate, with payments calculated on a 20 year amm if you go the term loan route.  This all depends on terms you can access and obviously the bank's lending appetite for real estate.  

It is generally easier to access equity from properties you own than to originate financing for something you want to buy. My recommendation is to stick with the consumer based products as long as possible before jumping over to the commercial side. The consumer language, while still favorable to the banks has all sorts of consumer protection clauses in there, more regulation in your favor and are easier to qualify for....assuming you have good credit and a W-2 that can support the DTI ratio....yes, they will count rental income as additional income. The commercial side has loan agreements that are almost 1 sided in how they favor the banks. They can call the note due on demand, there is a 5 year balloon payment, you are subject to all sort of covenants, fees etc. That said...they will look simply at the income from the property and while they will still look at your credit and how much you have in the way of liquid W-2, no problem in terms of getting a loan for those properties. If you just quit your job and have 3 car payments and two mortgages and $50 in the bank....don't hold your breathe. If you can support yourself and and let the properties do their own thing....that is where they will let the properties stand for themselves in terms of financing them. They will look at the income potential of the property they lend against as well as future properties you acquire.

Run various scenarios and decide what you want.  12 houses mortgaged to the hilt with the work, stress, risk and upside potential of twelve houses or 3 or 4 houses with minimal leverage, similar overall cash flow due to lower leverage, lower work and risk but overall lower upside because you are just dealing with 3 or 4 houses.

Good luck.

First, you need to search the forums "blanket loan";

These are not that easy, you still have appraisals and title work on all properties, you also need a release amount for each property, because things happen in life, you can't say a property will be held forever, nor is it always the best financial use of your assets.

You are correct, loan limitations are to the number of loans, not how many properties you own, in that respect, however, there are limitations as to the number of properties owned that place you in a commercial area as to some conventional loans, 10 properties and this seems to fluctuate so different lenders may have different thresholds, so you need to ask your lender.

On your 2 properties, going conventional now will most likely serve you better with the current low rates, if you can get a cash out on a non-owner occupied home, 2 loans, otherwise you'll be going to a portfolio loan or if a blanket loan to a commercial loan.

HELOCs are not good loans for long term financing, if you read the fine print, there are many things that may trigger the change in interest rates or having the loan commitment reduced or even called, they are best for short term financing needs that can be paid off quickly. :) 

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