Line of Credit On Rental Properties
Realtor · Gilroy, CA · Member since 2016 · 255 posts · 72 votes
Hello BP,
I currently have 8 residential rental properties with approx $5M in equity. I do not want to refinance them because I have low interest rates on all. However, I do want to access my equity to purchase more properties. I am looking for a lender that does consolidated line of credit or a commercial line of credit. I'd really appreciate it if you have great referrals for me.
I'm open to other ideas as well that can help me tap into my equity.
Thank you so much for you inputs,
@Jeet Sangha it sounds like you want to have a 2nd position Line of Credit on several investment properties. If I am misunderstanding this please let me know. This is just not anything that is occurring right now. I mean, I cannot speak for all 8,000 lenders in the US...but I would be willing to bet that no lender would be willing to do this. Is it possible to get a Line of Credit (LOC)? Yes, of course! But even if you got 1 Line of Credit that lender would require to absorb your current loan balance.
For example, a property you own is worth $200,000. You have a mortgage of $100,000. LOC are usually at 70% of the value, so $140,000 limit...but it would start with a $100,000 balance because they would pay off that 1st mortgage. The LOC lender only wants to be in "1st position" with a LOC.
This is pretty standard in investment properties. So if there was a way to maybe payoff one of the lower balanced mortgages, and then get a LOC on that one property, that would be an idea. Or maybe just taking the lowest balanced property and having a LOC that starts out with that balance maybe that's another idea.
I hope all of that makes sense.
@Jeet Sangha it sounds like you want to have a 2nd position Line of Credit on several investment properties. If I am misunderstanding this please let me know. This is just not anything that is occurring right now. I mean, I cannot speak for all 8,000 lenders in the US...but I would be willing to bet that no lender would be willing to do this. Is it possible to get a Line of Credit (LOC)? Yes, of course! But even if you got 1 Line of Credit that lender would require to absorb your current loan balance.
For example, a property you own is worth $200,000. You have a mortgage of $100,000. LOC are usually at 70% of the value, so $140,000 limit...but it would start with a $100,000 balance because they would pay off that 1st mortgage. The LOC lender only wants to be in "1st position" with a LOC.
This is pretty standard in investment properties. So if there was a way to maybe payoff one of the lower balanced mortgages, and then get a LOC on that one property, that would be an idea. Or maybe just taking the lowest balanced property and having a LOC that starts out with that balance maybe that's another idea.
I hope all of that makes sense.
Money's expensive right now. If you really need, you need to pay up. Could you cash out refi one property to pay off another (or even more than one other) property? Then put a first position LOC on the free and clear property/use. Many commercial lending departments will take first position for a LOC, but not second.
This is an instance where step two needs to be lined up before step one.
Thank you both, Andrew and Dan! I appreciate your feedback. I think that's the route I may consider.
Any idea about the interest rates on LOC these days?
Hello BP,
I currently have 8 residential rental properties with approx $5M in equity. I do not want to refinance them because I have low interest rates on all. However, I do want to access my equity to purchase more properties. I am looking for a lender that does consolidated line of credit or a commercial line of credit. I'd really appreciate it if you have great referrals for me.
I'm open to other ideas as well that can help me tap into my equity.
Thank you so much for you inputs,
Jeet, the above posts cover the points for the LOC route, but have you considered a 2nd lien bridge/mezz loan? The beauty and purpose of these loans is exactly what you stated - keep you current mortgages is place, and obtain a 2nd mortgage up to 75% CLTV (1st + 2nd mortgages combined). Yes, rates are high, double digits high (10-14%, 12% on average), so evaluate your numbers, and if the use of proceeds will allow you to invest in a higher return, or allow you to payoff the 2nd position note within the next 12-24 months, it may still be very profitable for you to keep scaling.
Example:
$7.5M Value x 0.75 (75% LTV) = $5,625,000 CLTV 'tappable' equity
-$2.5M 1st Mortgage
$3,125,000 potential 2nd position mezz loan to invest elsewhere, all without paying fees on refinancing the 1st mortgage or increasing your monthly there.
Now a 12% mezz interest only payment on $3,125,000 is $31,250 /mo. $375,000 /yr - in INTEREST payments, with no principal pay down. Of course only you know with your intended use of proceeds if that $3,1250,000 invested elsewhere will yield higher returns and make it worth it.
Hope this helps!
Thank you both, Andrew and Dan! I appreciate your feedback. I think that's the route I may consider.
Any idea about the interest rates on LOC these days?
Jeet, I'm not actively in the market. Here is what I got from a local bank (Scottsdale, AZ) last year. Since it's tied to prime, it could still be helpful as an example. Every market and every bank will be different.
"Rate: WSJ Prime +1%, Monthly Adjustable (Currently resulting in 4.25%)
"Term/Amortization: 12 months, Interest Only
"Origination Fee: 1% of commitment (Option to renew for additional 12 months for 0.25% of commitment)
"Doc Fee: $250
"We get a few appraisal bids for each deal, but for something like this, I imagine it would be ~$500
"Assuming you got a new tenant with higher rents we could certainly adjust the LOC upward (a fairly simple administrative change on our end). If you ever got additional properties, many of our clients have LOCs secured by multiple pieces of collateral to increase the loan amount as well."
Soo...WSJ Prime is currently 5.5%, so 6.5% for a LOC of credit isn't too bad, especially when conventional rates are nearly 6%.
His comment about a renter was because the size of the line is dependent on the income of the property. Basically, DSCR like many discuss here. The renter was well below market at that time, so that's why that comment was added.
Hope that helps, or gives a baseline of what questions you might ask a lender local to you. Good luck!