Strategy to raise capital through current assets?

Question

Hi BP'ers,

My parents and I are fairly new to the States, we own a couple of properties under my parents name and would love some feedback on ways of getting cash together for future investments as we are currently cash poor but with the following assets.

- Property 1 (SingleFH) is our primary residence, fully paid off, bought in 2009 for $715k, current value $950k

- Property 2 (MultiFH) is a rental property, almost paid off (<$25k remaining), bought in 2011 for $770k, current value $1m (rental income $5.5K per month gross, around $5K after total expenses)

The rental income is our only firm source of income, since we as a family own and run our small business (LLC) that is not making much profit but has given us our residency visa (but not green card) to live in the States. Our goal is to boost cash flow as much as possible either through flipping cheaper single family properties, or financing more multi family homes that will cash flow significantly after financing (too much to ask?)

What would you recommend as a strategy for pulling out the most amount of cash for the least amount of interest that would also not put us at too much risk? I am new to Real Estate Investing but I hope to make a career out of it.

Many Thanks!

Account Closed · Answer

Thanks Roger,

The properties are actually in my parents name not the LLC but we were looking at transferring these to the LLC to limit overall liability, but I guess this would not be beneficial if it would reflect badly on securing new financing with good rates?

Would we be better off pulling cash out through HELOC in order to further invest into more properties, or to put as little down on high interest, hard money loans that would directly bite into the cash flow or long term profit?

The major bank we use has quoted us at 35% down with around 4% interest for a conventional fixed term loan on a property we were looking to rehab and flip valued at 375K but we dont have the capital to put 35% plus the roughly $30k we needed to put into the property. Third Party lenders quoted a much lower down payment but with a 12% interest rate which im not sure if thats good or bad for third party lenders.

And worst case scenario, how would you factor in the potential for a major recession to take place in the near future? Would it still be advisable to do a HELOC or hard money loans if you were 3 months away from another financial crisis? Would interest rates shoot up if there was a repeat of 2008?

Sorry for all the questions this is my first forum post!

Gordon Cuffe · Answer

@Michael mo

Account Closedyour best bet is to take out a heloc on your primary residence. You get better terms on a primary residence. Then you can use the heloc as the down payment and rehab money for any fixer upper that you might purchase. There are many lenders that will give you rates in the 9%or higher range if you put 30% down. Which you get from your heloc. Don't worry about rates ,they will stay low for the rest of the year and maybe go up a little bit next year. If rates go higher it means our economy is going great. Now the hard part is finding a good deal that you can fix n flip.

Roger Vi · Answer

Account Closed

Regarding the different down payments and interest rates, I would go through each scenario and just compare the numbers. Most of it will depend on the property you buy and whether it can support the payments required by the loan you get. If the property cash flows enough, any terms can make sense. Just set your rules/requirements BEFORE you shop for property and stick to it. For loans, get rates from one lender and bring it to the next. Repeat a few times and you will know you have the best rate offer.

Regarding worst case scenario, you have to accept the risk and plan for it if you are going to leverage money in real estate. Reserve money is very important. More importantly, I prefer multi-families so when you have vacancies you can still cover loan payments (the whole thing doesn't sit empty).

If we were three months away from a financial crisis, I would get all the money I could get a hold of, short the market, and start shopping for my retreat island. ;)

Whenever a crisis comes, no one will be able to predict it except the guys that predict it every year/month/day. If you are investing, you just have to understand anything is possible and make sure you can handle the worst. If you couldn't handle being in debt during a crisis, don't get into debt in the first place. Buy cash only.

HELOCs and other loans all have different terms, pay attention specifically to adjustable rates and fixed rates. Adjustable means at some point you will not have the same rate, and it will get adjusted with the current prime rate. Could go up or down (at this point, it cant go down much lower). Fixed rate means you will have the rate for the life of the loan, regardless of what happens in the rest of the loan world.

Interest rates actually have nothing to do with the economy. Basically there is a lady named Janet and she's got 11 friends that vote 8 times a year whether they think it is wise to raise or lower rates. They call themselves the Federal Open Market Committee (FOMC).

Hope this helps!

Strategy to raise capital through current assets?

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