Help me understand mortgages for investment properties

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Help me understand mortgages for investment properties

Calvin Thomas
Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes

Here we go.  Initially, I was a web guy and I founded a few large web sites, which I sold a few years ago.  I still have a few, but the large ones I sold off.  I picked up a house, a car and the rest were in Vanguard funds.  After the crash, errr correction, I started to buy up Real Estate in NY/NJ/CT college towns.  I only have a few properties, but I keep on adding one or two every year to my portfolio.  I've always purchased for cash, no mortgage.  Some, I borrowed on margin against my portfolio, and just paid it off.  At a 1% rate on margin, it beats a mortgage any day of the week.  

Others are telling me now that I should look into commercial mortgages instead of funding them myself.  I am hesitant for a few reasons.  One, I hate debt.  When I was running one of my bigger web sites, I had seven figures of debt over my head as the sole owner each month (salaries, rent, expenses, etc.).  It was a lot of pressure for me (never took VC).  I sold in early 2008.  At that point, I had a few bucks and vowed never to go back into debt.  I run a tight ship with all my businesses.  There is a daily P&L ledger for everything.  

I also structure my real estate as each property is in its own LLC, which in turn, is owned by my main corp. Each LLC has its own insurance, and my main corp has an additional 4m umbrella in case of any liabilities from my disregarded entities (LLC properties).

I am not sure how the mortgage game works, as I've never had to deal with it before. I come in as a cash buyer always. If I am sure, I write a check from my margin account to my bank account, create a note to the new LLC, and get a bank check for the amount. I know I will not be able to continue to do debt free as I grow. However, I am just hesitant about mortgages. I do not like having to give tax returns, pay stubs, notices and reasoning as to why I only have a salary at this amount. Why don't I have a staff. How can you manage all of these properties yourself (I have a PM company sub-manage everything). Maybe I am missing something. Maybe I just do not understand the rationale. I am hoping someone can guide me here. It is not that I am afraid of going into debt. I know I can always borrow from my margin, or get a line of credit against any of my properties. I just do not like not owning everything 100% and having to listen to a bank demand this or that.

What am I missing?  Or, essentially, what am I doing wrong or not understanding which is holding me back from expanding further and faster on new opportunities due to my reluctance in taking on any debt?

Thank you.

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Chad Olsen
Lender · Morgan Hill, CA · Member since 2015 · 55 posts · 24 votes
10y

@Calvin Thomas, you have a really nice reserve fund so that is really good. I've been working on building my reserve fund up this past year and am nearly complete on that task so kudos to you.

The not wanting a mortgage on your credit is likely actually hurting your credit more than it is helping. There are things that really need to be in your credit profile in order to be desired by the banks to give out more credit. And a huge part of that is how well do you already treat other people's money, ie loans, mortgages and credit cards.

Your comment about not wanting to be rich is confusing. If you don't want to be rich, or even wealthy (have free time to do what you want b/c your passive income exceeds your expenses) then why would you be buying rentals or doing anything in the market at all? I'm not afraid to say that I want to be wealthy. I want to be wealthy, so wealthy that I can buy back all my time and spend it as i see fit, not doing what I "have" to do.

There are non-recourse loans out there (no personal guarantee), but you have to have a track record or some other factor that can offset not having a history of treating banks money well. Going after the non-recourse loans is good, I'm working in that direction too. But that doesn't happen overnight and you have to show a good history.

I would recommend two things:

1) Get a copy of the Value of Debt and read it and think about it

2) Reach out to CreditSense.com. The education alone is worth the time to understand what you don't know about your credit profile. I've had the education and am convinced that a strong credit profile is key to getting credit.

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  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y
    Originally posted by @Dan Vleck:

    I am also a fan of Dave R. I have mortgages, but often wonder if I should start paying them off or buying more with loans. I've decided that I'd keep buying more with loans until the banks stop lending me money. Then I will pay them down. This method provides me the best rate of return. After reading The Millionaire Real Estate Investor, I decided there was no right way to do REI. People have become wealthy many different ways, regarding how they financed.

    I hope your success continues @Calvin Thomas.

     No doubt.  Different strokes for different folks.  What works for one person, may or may not work for another.  I applaud your success.

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  • Rick SantasierePro Member
    Real Estate Broker · Granby, CT · Member since 2015 · 694 posts · 317 votes
    10y

    I loved reading this thread. It was excellent with a great deal of knowledge from some great minds. I have this "fight" in my head ALL THE TIME. In my personal situation, I am harming myself by being "over-leveredged," (reducing cash flow) but applying Dave Ramsey's logic of paying down debt quicker. Sadly, paying down debt that is at 3-4.5% interest (and tax deductible) is rather silly. I cannot acquire commercial lending with my current DTI ratios, but will have a portfolio paid off before I am 50. Sounded good at the time, but... If only I had taken all 30 year mortgages, I would look so much better..

    I think this is where your own personal preference wins, but in the end Calvin, incurring debt can make you much more powerful and create wealth (and drastically move the needle on your net worth north) by buying right (below market value), and increasing cash flow on a monthly basis.  There are a lot of people out on BP who would love to have your "problem." You should be very grateful to be in such a quandary.

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  • Chad Olsen
    Lender · Morgan Hill, CA · Member since 2015 · 55 posts · 24 votes
    10y

    @Calvin Thomas all good points. And I think that @Dan Vleck made a great point, different strokes and all that. That being said, my wife and I go through this discussion about once a month on what is a better way to acquire rentals, or even a primary residence. I'm more in the camp of intelligently use leverage/mortgages to maximize our investing dollars and she is more in line with using leverage, but smaller leverage and use more investing dollars on a given asset. And it's different every time we talk because the situation is different. So even if you have a given strategy that works, it may not work in every situation.

    That is where knowing your criteria and pertinent information about a deal is key. As our mentor keeps telling us, the asset is either a good deal or a bad deal all on its own. The numbers have to work out first. Then you place financing around the asset. Financing doesn't make a deal good or bad, it just amplifies the deal whether good or bad. So knowing your reserve needs, DCR, BER, demographics, vacancy and other important factors about a given rental property (if you are in other assets know the keys there) for good or bad. If those numbers don't pencil out before hand, it won't matter what the finance stack is like, it will always be a bad deal.

    But this is where a good deal can also become a great deal if you have the right kind of finance around it. Using all cash is powerful for getting the great deals quickly while they are there, after all cash is king. But then you have large amounts of liquid capital tied up in a property for at least a few years if not forever. So without a mortgage of some kind that money will be poorly utilized long term. Getting a HELOC on those properties or getting a blanket mortgage for say 50% of the value of your portfolio can really be a powerful way to redeploy that capital. Say you had 5 properties, all cash, valued at $500k (easy #'s). If you got a blanket mortgage on it for $300k, you would have 60% of your capital back, with a huge buffer for market fluctuations and redundancy with 5 doors paying a single note. So your vacancy volatility is reduced. Now you can take the $300k and either buy more properties all cash or repay your LOC on your portfolio and search for the next great set of deals. Then rinse and repeat.

    The only downside that I have, personally speaking, is that I don't like using a loan (personal, LOC, HELOC, etc) as my down payment. The down payment is the riskiest money in real estate and the first money to disappear when the market dips. Which is why the banks want you to put a bigger amount down. This further protects their position in the mortgage. So when you have a loan for the down payment, and the market dips, you now are not only upside down on the property, you also owe money on a position that is no longer there. Big down side risks. This is where a strong partnership comes in. Someone has to put the down payment down, I just would rather partner with someone and further mitigate my risk in a deal. I can bring value to a deal in many ways, through management, deal finding, even down payment, but I feel that MY money is better utilized elsewhere. Again, this is my opinion. Sometimes it works, sometimes it doesn't. Depends on the deal.

    The hard thing is that many times these concepts are competing and you can do one OR the other. Sometimes you can find some common ground and do a mix of both. And this is where the debate usually goes for us, and looks like this community in general. Hopefully I didn't muddy the waters too much.

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  • Calvin Thomas
    OP
    Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes
    10y

    @Rick Santasiere: Thank you for the kind remarks.  Yes, I am fortunate to be in this position.  Please note, costs had to be paid.  Not financial, but high costs nonetheless.  Yes, it is nice to be financially secure, but money isn't everything.  The only thing that is more valuable than money is time.  Once it is gone, it is not coming back, no matter how much money a person has. 

    @Chad Olsen: I get the debt mortgage route.  As I've said before, I am the lone wolf (aside from my wife) who has a negative outlook towards mortgages.  Plus, I've looked for non-recourse mortgages and mortgages based only on my company without a PG, with NY banks, it seems non-exsistant.  I would have to PG it and it will be on my credit.  Since I am married, they want to bring my wife along for the ride as well.  My wife will NOT sign a loan with me, nor would I ask her too.  I went to Citi, Chase, TD and a few others.  All want PGs and the mortgage will be on my personal credit even though my main company, with assets north of 3m and zero debt, and a C-corp, owns and buys the properties.  Makes no sense.  These new rules for a commercial mortgage are really ridiculous.  Hence the fact I was basically going to consider banking the mortgage myself by essentially being my own bank with a margin loan against my stocks/bonds/etc.  

    To be honest, I've seen debt ruin so many good people, that could be the reason why I am so against it.  To beholden to a bank on my property would probably just boil me to the bone.  It could be that I would just write a check from my margin account or pay it off from my reserves just to get rid of the debt.  I really do not like debt.  Also, I was in debt 20 + years ago, and it was a horrible feeling.  Hence the reason why I am so adamant against it. I would consider a line of credit though.  However, the banks around here STILL want a PG , tax returns and it to be on my credit.  It really is just crazy.  They certainly do not make it easy to borrow money.  These bankers can drive a person insane.  I currently have six properties (just closed on two last week).  I really wanted to get to 10 by the end of the year.  However, it would be difficult to do without a business line of credit or a margin loan from myself.  Quite a conundrum.

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