Leveraging a trust held free & clear rental property

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Leveraging a trust held free & clear rental property

Ken T.
Dallas, TX · Member since 2016 · 78 posts · 31 votes

Hello BP!

My family and I have three properties (1 primary, 2 rental) held in one family trust. They trust my methods and are allowing me to leverage the equity to invest in real estate.

1) Primary property was purchased about 5 years ago for $700k with market value up to $1.4m.

2) 1st rental property was purchased about 5 years ago for $300k, current market value is about $800k if rehabbed to sell. Loan balance about $200k

3) 2nd rental property was purchased 25 years ago. Current market value is about $1m, should have very little/low loan balance.

My parents are allowing me to tap into one of the properties to fund my fix and flips, new rental acquisitions or private lending. How could I go about this to maximize the opportunity? I did some research online and just came out a bit more confused than going in. 

Possible scenario:

I have a friend who is currently funding a flip with hard money, 2 pts @ 10%. They would be open to replacing that loan with a more favorable loan from me. How would go about structuring their loan replacement? I want to be careful and not make any mistakes with my family's money.

Questions:

Should I be looking to refi or a HELOC?

Is it possible to get a HELOC against a rental property? From what a Chase Bk rep told me, this is a no.

Should I use this equity from private lending for other people's flips or should I be purchasing properties in my own name? 

What else am I missing before I dive head first with other people's money?

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Albert Bui
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
8y
Originally posted by @Ken T.:

Hello BP!

My family and I have three properties (1 primary, 2 rental) held in one family trust. They trust my methods and are allowing me to leverage the equity to invest in real estate.

1) Primary property was purchased about 5 years ago for $700k with market value up to $1.4m.

2) 1st rental property was purchased about 5 years ago for $300k, current market value is about $800k if rehabbed to sell. Loan balance about $200k

3) 2nd rental property was purchased 25 years ago. Current market value is about $1m, should have very little/low loan balance.

My parents are allowing me to tap into one of the properties to fund my fix and flips, new rental acquisitions or private lending. How could I go about this to maximize the opportunity? I did some research online and just came out a bit more confused than going in. 

Possible scenario:

I have a friend who is currently funding a flip with hard money, 2 pts @ 10%. They would be open to replacing that loan with a more favorable loan from me. How would go about structuring their loan replacement? I want to be careful and not make any mistakes with my family's money.

Questions:

Should I be looking to refi or a HELOC?

Is it possible to get a HELOC against a rental property? From what a Chase Bk rep told me, this is a no.

Should I use this equity from private lending for other people's flips or should I be purchasing properties in my own name? 

What else am I missing before I dive head first with other people's money?

HI Ken,

The primary you can go up to 85-90% LTV of the current appraisal value with interest only payments on a HELOC.

The rental's you can get HELOC's as well but only from local community, commercial, or credit unions like penfed.org up to 70-80% LTV around mid 5's.

You never go to big banks to ask them about HELOC's as the answer is predictably, NO.

HELOC is great if you're going to draw money out and replace it relatively quickly since you only pay interest when the funds are being used. The downside of course is that the rate is monthly variable so it can change from month to month. If the fed increases the fed funds which is directly linked to prime (usually 3.00% or 300 Basis points above fed funds) it will cause your HELOC monthly payment to go up immediately.

The upside of a fixed loan is that you get all of your money upfront and you lock in that segment of money for a fixed duration and term so there are no surprises in monthly payment. The downsides is that you will pay interest day one so hopefully you have a deal to deploy the money in so you can get traction right away.

Hope that helps on the strategy.

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  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    8y
    Originally posted by @Ken T.:

    Hello BP!

    My family and I have three properties (1 primary, 2 rental) held in one family trust. They trust my methods and are allowing me to leverage the equity to invest in real estate.

    1) Primary property was purchased about 5 years ago for $700k with market value up to $1.4m.

    2) 1st rental property was purchased about 5 years ago for $300k, current market value is about $800k if rehabbed to sell. Loan balance about $200k

    3) 2nd rental property was purchased 25 years ago. Current market value is about $1m, should have very little/low loan balance.

    My parents are allowing me to tap into one of the properties to fund my fix and flips, new rental acquisitions or private lending. How could I go about this to maximize the opportunity? I did some research online and just came out a bit more confused than going in. 

    Possible scenario:

    I have a friend who is currently funding a flip with hard money, 2 pts @ 10%. They would be open to replacing that loan with a more favorable loan from me. How would go about structuring their loan replacement? I want to be careful and not make any mistakes with my family's money.

    Questions:

    Should I be looking to refi or a HELOC?

    Is it possible to get a HELOC against a rental property? From what a Chase Bk rep told me, this is a no.

    Should I use this equity from private lending for other people's flips or should I be purchasing properties in my own name? 

    What else am I missing before I dive head first with other people's money?

    HI Ken,

    The primary you can go up to 85-90% LTV of the current appraisal value with interest only payments on a HELOC.

    The rental's you can get HELOC's as well but only from local community, commercial, or credit unions like penfed.org up to 70-80% LTV around mid 5's.

    You never go to big banks to ask them about HELOC's as the answer is predictably, NO.

    HELOC is great if you're going to draw money out and replace it relatively quickly since you only pay interest when the funds are being used. The downside of course is that the rate is monthly variable so it can change from month to month. If the fed increases the fed funds which is directly linked to prime (usually 3.00% or 300 Basis points above fed funds) it will cause your HELOC monthly payment to go up immediately.

    The upside of a fixed loan is that you get all of your money upfront and you lock in that segment of money for a fixed duration and term so there are no surprises in monthly payment. The downsides is that you will pay interest day one so hopefully you have a deal to deploy the money in so you can get traction right away.

    Hope that helps on the strategy.

    1Reply
  • Ken T.
    OP
    Dallas, TX · Member since 2016 · 78 posts · 31 votes
    8y

    @Albert Bui Wow that was very informative! I will definitely look into both right away. 

    I'll steer clear of Chase for the HELOC. Sounds like the strategy I should take for my scenario would be:

    1) Refi the rental

    2) Take over this flipper's loan as 1st position lender

    3) Repay the refi loan upon disbursement 

    4) Attain a HELOC

    5) Fund the next acquisition with the HELOC

    6) Refi the same rental

    7) Pay off HELOC

    8) Pay off refi loan upon disbursement

    Am I missing anything here? 

    0Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    8y
    Originally posted by @Ken T.:

    @Albert Bui Wow that was very informative! I will definitely look into both right away. 

    I'll steer clear of Chase for the HELOC. Sounds like the strategy I should take for my scenario would be:

    1) Refi the rental

    2) Take over this flipper's loan as 1st position lender

    3) Repay the refi loan upon disbursement 

    4) Attain a HELOC

    5) Fund the next acquisition with the HELOC

    6) Refi the same rental

    7) Pay off HELOC

    8) Pay off refi loan upon disbursement

    Am I missing anything here? 

    In terms of how to structure your private money note, look at whats competitive for HML - hard money loan and whats competitive for PML then find some where in between, maybe 8% and 1 pt or 9.5% no points and 1 pt for 3 month extension if needed at the end of 180 days etc.

    As for mortgage strategy to obtain the capital from your primary and your 2 rental's Id recommend the loans/HELOC's on the primary first since that will be your cheapest source of capital second to your rental properties which will have .50% to 1.00% higher in interest cost to obtain capital from those.

    The higher the cost of capital the less arbitrage/profit spread in rate you will have while you carry this mortgage note during the investors flip.

    Sometimes you can bake in the points at the end when they go to pay you off so that the investor does not have to bring the points in upfront or silent payment on the interest meaning no payment till the payoff at the end of 6 mos, etc.

    Lots of ways to structure to create a win win thats why RE for the Win.

    1Reply
  • Ken T.
    OP
    Dallas, TX · Member since 2016 · 78 posts · 31 votes
    8y

    @Albert Bui Thank you very much! That's very insightful. 

    Should I be lending under a corporation or would as an individual suffice? Considering it's lending and the liability is not on the lender's shoulders I figured it won't really matter. 

    0Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    8y
    Originally posted by @Ken T.:

    @Albert Bui Thank you very much! That's very insightful. 

    Should I be lending under a corporation or would as an individual suffice? Considering it's lending and the liability is not on the lender's shoulders I figured it won't really matter. 

     Sure if you want the protection, you’re already paying CA franchise tax board $800 a year min anyway to do biz in CA so mind as well utilize the states laws for corps. The best you can.

    0Reply
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