Southeast · Member since 2017 · 172 posts · 13 votes
Hi Guys, Have several SFRs, mostly cash bought, all of them are valued at +40% of my investment,
I want to pull cash out of a few of them and keep buying more distressed properties-
Given that all of these will fall under a commercial loan criteria (llc) , I was offered the following terms:
6% @ 20 year term with 5 yr ARM and than fixed for the following 5 years, which is an average minus offer , i guess(?)
this loan will substantially hurt my cash flow, although still positive.
Me being mostly cash-flow focused right now - will it make sense to try and get and a couple of years "Interest only" loan at a conservative 50-60% LTV?
as far as the risk involved with IO loans - apart of potential fluctuating values (which i dont foresee it it dropping even close to 40% anyhow) what other risks i am facing here?
i am having a hard time understanding how sending the principal portion to die off at the bank better then me keeping it and re-investing ?
Because I'm BRRRRing, the rates vary by rehab size and some other factors but generally they are low 6% for the product I described with a 100k purchase and <30k rehab, ARV around 170k.
Great question. I struggled with a similar situation myself. Could never find Very much good information online.
Ultimately what I decided to do was go with a portfolio loan (LLC) from my hard money lender. The product I preferred was the 5/1 ARM on 30 yr term with first 5 yrs IO. Like you, I figured that having the cash flow up front to re-invest rather than waiting to cash out down the road was a better choice for my goals, so I don't mind losing the principal pay down for the higher cash flow in the beginning. So long as there is enough equity cushion to absorb any market shocks. Because I plan to hold for at least 5 years, I'm comfortable with 15% or more equity in my current markets, so I generally will do a 80% or even 85% LTV on the cash out refi.
Hope this helps. I only recently started but so far I haven’t found a downside to this strategy. Best of luck to you!
Because I'm BRRRRing, the rates vary by rehab size and some other factors but generally they are low 6% for the product I described with a 100k purchase and <30k rehab, ARV around 170k.
The main thing i was debating with myself was whether or not i should treat single family portfolio similar to a commercial or multi-family value add deals - the main difference is how its valued - on commercial/multifamily the value is a factor of its income, while single family is solely based on sold comps, therefore have less control over the value and are left to the market's valuation which tends to be more volatile comparing to rent rates.
I think the IO route could be safe if you are Conservative with the LTV and have enough cushion to sustain any downturn that provide enough time to liquidate,
You are absolutely right about the valuation methods, and for that reason I don't treat them exactly the same. I am willing to take more risk on commercial if I have solid strategies for improving NOI. However as you pointed out the SF side is more sensitive to the market and therefore I always build in similar cushion as with equity. In most cases I pass on deals that can't remain positive cash flow with a 15-20% drop in rent. This is without the interest only option as I run my criteria on base numbers before altering the strategy with tweaks such as IO. My goal in today's market is to ensure I never have to liquidate, that way I can just hold through a downturn and still cash flow if needed and wait to sell in the next expansion.