Leveraging existing 4plex (owned outright) for another deal

7 Replies

(Intro note: First time poster; regular pod listener. Have begun focusing on real estate investment in just the past 18 months, doing 3 deals, so I'm a relative newbie; confident I'll have follow-up questions. And thank you!)

I own (through a trust) a Fourplex, purchased this year, owned outright (per a 1031 exchange). It was a Buy, Rehab, Rent and ____. There was no financing, so it's just a BRR_...and would like to explore the brrRefinance of some sort. (It generates ~$4400 gross monthly rent with a Zillow value (I know that doesn't count) of 540k.) 

I want to use the asset to leverage another multifamily property. What's the best route? Commercial loan 30% down with 5 years fixed (that was a local bank's initial suggestion)? Conventional mortgage on the NEXT property, and just use income from the initial fourplex, without burdening that initial fourplex with debt? Something else? 

I would opt to sell it as soon as possible with the rent to property value being so low. Based on the value of your dead equity you are deep into negative cash flow.

Alternately  get a 30 year mortgage on it for as much as you can get out of it.  If it does not produce positive cash flow with maximum financing you are back to selling.

Thanks so much for the reply. Would prefer the loan option. There is still a chance for more rental revenue. And might need to buy out of my area to get better performance. (In Portland, market cap rates for 2-4 units are not very owner favorable.) Although I hear you on your advice to consider selling.

That said, what's the best method to get a loan/mortgage on an existing income property? My ham-handed research is getting mixed results. On one hand, some say it's readily doable (https://www.trulia.com/voices/Financing/How_can_I_mortgage_an_investment_property_that_I_o-248127)

But this from elsewhere on the infallible Internet (http://forums.moneysavingexpert.com/showthread.php...:

"There are no banks that are taking charges over unencumbered properties and lending money against them for people to buy other properties with. The only way you can achieve what you are looking to do is by being dishonest on your mortgage application - and mortgage departments are going through things with a fine tooth comb - after all they are not exactly inundated with work at the moment!

If you are living in one of the properties and it has no mortgage the only way to do it (and I am not condoning it) is to apply for an offset mortgage like the First Direct are offering at the moment. They will lend around 3X salary and up to 80% of the valuation, if your BTL properties are self financing they will disregard them. You must have a good/valid reason for drawing out money from the property - and by telling them it is for the purchase of another property you will have no chance."
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Hey Jefferson, 

If I'm reading your goals correctly, you're looking to retire soon? I'd really consider locking that property up as a wholly owned property that supports the rest of your investments. You certainly can leverage that four-plex, get debt against it, and use that debt to purchase another property. I can set you up with a lender and a local bank, both of whom would easily help you pull money out of it. But! You're not looking at a 30 year timeline if you're trying to retire in the next few years. I think, in this case, I'd be far more conservative. Having that property paid off, as the foundation of your rentals, is what I'd aim for. Normally, I advocate for a more aggressive approach and there is certainly an argument to be made there for that style of investing. Really, you need to decide for yourself what your long-term goal is. If you've got the time, pull the money out and re-invest. If time is not a luxury, then I'd say you hang on to what you have. 

Let us know what you decide to do! 

Thanks Matthew. I have 20 years before retirement, and actuaries think I have 40 years still to live. (Perhaps I should select a younger-looking picture!) 

A baseline goal would be to secure strong passive-ish income within 10-15 years from now, and build the capacity for wealth in 30+ years (knock wood...to 50 years? Knock wood) to leave behind to support a small handful of nonprofit organizations (including particularly those that I have co-founded), in the next 30-45 years (and to children if I’m lucky enough, although that may not happen). 

A bigger goal would be to build enough wealth that the three or so organizations I bequest have real money, and to knit a network of do-gooder investors who help support democracy and opportunity. 

So yes, a more aggressive strategy s what I am looking for, although builtmin a way that hedges against a downturn or crash. 

Hey Jefferson, I was a credit officer in both huge national banks and local community banks, so I'll approach your question from that angle and only discuss the mechanics of the financing rather than the wisdom of holding vs selling (that's something you can figure out, I am sure). A four-plex can fall under consumer, residential guidelines or commercial underwriting guidelines. Large, national banks typically don't have an appetite for deals like this and the folks at the branch level don't typically have the credit background to understand the deal anyway. I would stick with the small community banks with an experienced lender with actual credit authority. Believe it or not, lenders typically start at large banks and they "graduate" to community banks after cutting their teeth. National banks require the loan to go to a central underwriting department. Community banks typically decentralize the decision making process for smaller deals like this one into the hands of local officers. If that officer has experience and a formal credit background, ask them what their loan limit is. That is the amount that they can unilaterally sign off on to make the loan decision without going up the food chain or to a loan committee. The loan limit will be different for real estate backed and unsecured loans. If the officer's loan limit is greater than your loan request, you are probably talking to the right person. They can tell you whether a deal will fly or not. Most banks hate backing real estate investors. They also will usually want more than 18 months of experience as well (usually at least 2-3 full calendar years with tax returns to back the cash flow). Find the person I described above and they should be able to give you the answers you seek. Good Luck!

Thanks so much Doug Smith (my brother from another mother)! 

Takeaways: 

1) Find a community bank or credit union

2) Find a loan officer with lending authority up and including the amount I'd like to borrow. 

Bon chance in Tampa! 

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@Jefferson Smith Banks in here town will definitely lend to you to pull cash out to purchase more real estate. We work with several great lenders that love us for this reason.

There are multiple ways to unlock your equity in the property. You could buy another property on terms and recollateralize the note onto the 4 plex and then sell the other property for cash, you could hold it for a little longer and then 1031 exchange into a large property, you could lease option it to get a cash downpayment to fund another acquisition, etc etc.

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