Refinancing low income properties
Rental Property Investor · Richmond, VA · Member since 2017 · 102 posts · 28 votes
Easy solution. Here is what we do. It takes this "challenge" (notice the word problem is not used here ;-), and turns it into a better solution than refinancing. We originally set this up to marry my Michigan cash flow market with the California flip market. They flip and bring their profits here as cash buys for cash flow. This is a modification of our Turn Key model. Here are the "challenges" for each of the scenarios.
Scenario #1: Out of State Buyer
Challenge A: Being out of state, and having to deal with a problem tenant or property
Challenge B: Being out state, and not knowing the market
Challenge C: Being out of state and not seeing the property (could be sold a "dog")
Scenario #2: Small ARV property values...can't finance (buy or refi)
Challenge A: 75% of ARV too small for a REFI loan
Challenge B: Cash used to buy gets burried in property until Cash Flow pays it back. This can take many years, and while this is in place, the money is dead.
Challenge C: Can't use HML to buy/Rehab ...(see Challenge A and B)
Scenario #3: There are many New REI investors that can't get started because of...
Challenge A: No knowledge, experience, or Power Team in place
Challenge B: No time (working at J.O.B. full time)
Challenge C: Very little cash to invest with (maybe $5 - 25k)
Our solution, is to set up our LLC's that own the properties (one for each) with openings for partners. These openings are filled by out of state or limited newbie partners. We can break these partnerships into smaller, but equal, segments. Any new partner can take multiple (all if they want in the case of an OSB) partnerships. This means we have eliminated any Wholesaling from us, and our buyers don't need to use Wholesalers with unknowns. This has allowed us to tap into all three of the above scenarios because of these solutions.
Scenario #1: Out of State Buyer
Solution A: We stay on board as the managing partner
Solution B: By staying on as Managing Partner, the OSB is confident in the project. WE know the markets.
Solution C: By staying on as Managing Partner, we have a vested interest in the deal...and would be the ones dealing with any problems, at a reduced return for us. We're not going to do this if this is a "dog".
Scenario #2: Small ARV property values...can't finance (buy or refi)
Solution A: No loan, no 75% limit, no 6 month seasoning, maximum cash flow splits
Solution B: Cash we put in is returned to us, either all at once or in pieces.
Solution C: No loan to pay back, no credit partner, no cost of money.
Scenario #3: There are many New REI investors that can't get started because of...
Solution A: No need for knowledge, experience, or Power Team...we are those things
Solution B: No physical involvement (meaning no time involved) for the new partners
Challenge C: Partnerships splits are set up between $5 - 25k, depending on the particular property.
Needless to say, this has been very popular with many REI in the above scenario groups. Like I said, this is how we solved the problem of low ARV/REFI...and it ended up solving even more problems than that.
I want to preface this post by saying I'm not an experienced investor (so take this with a grain of salt) but I have heard and read on BP that other investors use a "blanket" or "portfolio" loans to bundle up multiple properties under one loan. I believe your smaller and community banks are more willing to do this because they would keep these types of loans in-house opposed to selling the loan on the secondary market.
Great question !!
Correct gentlemen.. @Brandon Becsi The best way to approach this would be a blanket loan. How many homes do you currently have that you want to cash out and what are their average values?
Easy solution. Here is what we do. It takes this "challenge" (notice the word problem is not used here ;-), and turns it into a better solution than refinancing. We originally set this up to marry my Michigan cash flow market with the California flip market. They flip and bring their profits here as cash buys for cash flow. This is a modification of our Turn Key model. Here are the "challenges" for each of the scenarios.
Scenario #1: Out of State Buyer
Challenge A: Being out of state, and having to deal with a problem tenant or property
Challenge B: Being out state, and not knowing the market
Challenge C: Being out of state and not seeing the property (could be sold a "dog")
Scenario #2: Small ARV property values...can't finance (buy or refi)
Challenge A: 75% of ARV too small for a REFI loan
Challenge B: Cash used to buy gets burried in property until Cash Flow pays it back. This can take many years, and while this is in place, the money is dead.
Challenge C: Can't use HML to buy/Rehab ...(see Challenge A and B)
Scenario #3: There are many New REI investors that can't get started because of...
Challenge A: No knowledge, experience, or Power Team in place
Challenge B: No time (working at J.O.B. full time)
Challenge C: Very little cash to invest with (maybe $5 - 25k)
Our solution, is to set up our LLC's that own the properties (one for each) with openings for partners. These openings are filled by out of state or limited newbie partners. We can break these partnerships into smaller, but equal, segments. Any new partner can take multiple (all if they want in the case of an OSB) partnerships. This means we have eliminated any Wholesaling from us, and our buyers don't need to use Wholesalers with unknowns. This has allowed us to tap into all three of the above scenarios because of these solutions.
Scenario #1: Out of State Buyer
Solution A: We stay on board as the managing partner
Solution B: By staying on as Managing Partner, the OSB is confident in the project. WE know the markets.
Solution C: By staying on as Managing Partner, we have a vested interest in the deal...and would be the ones dealing with any problems, at a reduced return for us. We're not going to do this if this is a "dog".
Scenario #2: Small ARV property values...can't finance (buy or refi)
Solution A: No loan, no 75% limit, no 6 month seasoning, maximum cash flow splits
Solution B: Cash we put in is returned to us, either all at once or in pieces.
Solution C: No loan to pay back, no credit partner, no cost of money.
Scenario #3: There are many New REI investors that can't get started because of...
Solution A: No need for knowledge, experience, or Power Team...we are those things
Solution B: No physical involvement (meaning no time involved) for the new partners
Challenge C: Partnerships splits are set up between $5 - 25k, depending on the particular property.
Needless to say, this has been very popular with many REI in the above scenario groups. Like I said, this is how we solved the problem of low ARV/REFI...and it ended up solving even more problems than that.
So, @Joe Villeneuve, when an owner goes to re-fi a low value property, as in Scenario #2, what does the solution look like? One (or a few) investors give their funds to the owner (acting like they are refinancing the deal) in exchange for a %age of the ownership (i.e. the cashflow and future equity)? Are there terms for repayment, or just a % of the ownership? Still getting my head around this option. I will be in this re-fi position shortly :)
Thank you! And hope that your lengthy post means all is well for you :)
So, @Joe Villeneuve, when an owner goes to re-fi a low value property, as in Scenario #2, what does the solution look like? One (or a few) investors give their funds to the owner (acting like they are refinancing the deal) in exchange for a %age of the ownership (i.e. the cashflow and future equity)? Are there terms for repayment, or just a % of the ownership? Still getting my head around this option. I will be in this re-fi position shortly :)
Thank you! And hope that your lengthy post means all is well for you :)
Yes, no/yes...and yes...and thanks for asking.
Ok, now the details.
Yes...Partnerships splits are made available (each property is different as to how). Partners can take more than one, but the splits can't be resplit. One partner can take all that are made available. Splits represent a % of ownership in the LLC that owns the property. Cash flow and future equity/profits above original ARV are also split at that % to them.
No/Yes....there are no terms for repayment since this isn't a loan. This is a % ownership (see above paragraph).
Yes...I'm feeling great...and again, thanks for asking. Will I see you this coming Tuesday? I can give you a better explanation, with numbers then if you like.
George Taylor and Joe Villeneuve thanks for replying, say you have just one 45k arv property that is paid off and you want to refinance/pull cash from?
How much cash did you put in? Is the $45k the current ARV? What is the Cash Flow?
following and pondering....
Joe Villeneuve 37k all in with current cashflow $825 per month
75% of $45k is only $33,500, and with closing costs taken out, you wouldn't come close to getting all your cash back out with a refi anyway.
Doing a Partnership, you just set how much you want to get back in cash, calculate what % of the ARV that is (you keep the rest), split that up into equal parts (up to you based on # of partners or total cost for each partner). Split the CF along this same % ownership.
You walk away with loser cash flow, but you get at least all of your money back...and then some if you want.
Joe Villeneuve so say the house has an arv of 45k and I want to get 80% cash out of the house.... so (45k x .8 = 36k) that means i would find a partner(s) that would pay me 36k for 80% of the monthly income?
...or 2 at $18k, or 3 at $12k.
Here's another perspective. Banks don't like to lend on those because they are too risky and not profitable enough for them ... perhaps you should consider if they may be on to something.
@Joe Villeneuve So current ARV is 45K then you sell 80% for 36K in doing so you give up 80% of Cash flow and future appreciation. If current Cash flow is 825 then you gave up 660 per month to get 36K not including what was given up in future appreciation. 660 per month seems like an expensive way to get 36K.
Now I like the creative way to solve many different challenges but it seems like the owner gives up a lot in this solution. The beauty of leverage is that you also leverage your appreciation but in this instance you are giving away your appreciation as well. The original owner would be better of getting a 20 year loan at 12% interest then giving up that much cash flow. The loan would have a lower monthly payment and in 20 years you would have all the equity back. I see why this is good for the Cali investor as they get a good return but why is it better for the original investor than packaging properties together and getting a bank loan?
@Joe Villeneuve So current ARV is 45K then you sell 80% for 36K in doing so you give up 80% of Cash flow and future appreciation. If current Cash flow is 825 then you gave up 660 per month to get 36K not including what was given up in future appreciation. 660 per month seems like an expensive way to get 36K.
Now I like the creative way to solve many different challenges but it seems like the owner gives up a lot in this solution. The beauty of leverage is that you also leverage your appreciation but in this instance you are giving away your appreciation as well. The original owner would be better of getting a 20 year loan at 12% interest then giving up that much cash flow. The loan would have a lower monthly payment and in 20 years you would have all the equity back. I see why this is good for the Cali investor as they get a good return but why is it better for the original investor than packaging properties together and getting a bank loan?
Not expensive at all...in fact it's far less expensive. Actually, it's free to me. Financing, loans, are just another way to leverage cash...which is what you are actually leveraging. In both cases, the original money comes back to me "with friends" (profit and cash flow). There is more cash flow without the loan (no debt service, and no credit partner).
I'm not giving up 660/month...I'm getting my original money back, with friends...to use again on the next deal, repeated over and over and over and... This is faster (no seasoning), and I can get a higher cash back.out (no 75% limit), than if I went the refi route. That $36k goes right back into the next deal, flipped through cash leveraging, and repeated over and over again. I'm not losing anything...I'm compounding my $36k.
Why would I want to wait 20 years to get anything back? I get it all back right away. If I left that in, even if I used only 20% as a down payment, I have to wait to get my money back through the cash flow. My way, I'm not waiting for anything...and that reduced cash flow you are frowning at, is pure profit...from day one...and, that cash I put in, isn't just sitting there dead waiting for the cash flow to catch up in, what did you say?...20 years? We could have 2 or more 2008's occur within those 20 years, and my "resting" cash and supposed equity build disappears.
If you understand what leveraging does, you'll see that this is in fact just a different way of leveraging...just without the added subtraction of loan cost and credit partner off the top.
If I took that $36k and split it up so that it represented 20% down payments, it would get me $720k in value...and I would be dead in the water until I generated more down payment funds...and, I would have spent that $36k since those funds went in one direction...away from me.
If I took that same $36k and paid cash, then took my route and recovered that cash plus profit (and kept CF), then move my recovered funds plus friends into the next bigger deal, then repeated this over and over again I would be light years ahead.
One more thing. If I take the "spending" the $36k for DP's, how much have I spent and how many uses did I get out of that $36,000? Answers: I spent $36,000 for 1 use.
If I take that same $36k, and "use" it an unlimited number of times, with each time I use it I get it right back with a profit, to use it again, and again, and again...how much have I spent, and how many uses did I get out of it? Answers: I spent NOTHING for an unlimited number of uses.
David Grabiner I am with your way of thinking on this point..Joe Villeneuve you also make a great point but i don't like giving up cashflow. I guess in the end its preference in your strategy/needs :)
I'm not giving up cash flow, and I'm not spending any money
Thanks for your response, you said a lot there but I would like to look at the numbers of how it would actually work. So lets stick with the example we had 45K ARV, 825 Cashflow, and lets assume the owner has had it for a year and that there are an unlimited amount of other deals exactly like it ready to be purchased. In your system you say you can reuse the 36K (80% of ARV) an unlimited amount of times, which is true but you are limited to how quickly that can be done in a year, because you have to purchase, rehab, rent and then find investors lets assume that whole process can be done in 3 months. So you can in practicality do 4 deals a year from that 36K. And lets assume you were able to find someone to loan at 80% ARV for 8% interested over 20 years for a mortgage of 300 per month. Disclaimer this loan probably wouldn't be given for only 1 property and would have to be part of a package but lets assume that OP as a package and he is debating between the two options but lets just look at 1 property to make the numbers simple. Ok now the numbers.
Option 1 your way- Present- 825 cash flow.
After split: (825*.20 )= 165 Cash flow
End year 1: (165*5 the orginal property plus the 4 more done through the year) = 825 Cash flow. After 1 year you have 5 properties giving you a total of 825 per month.
End year 2: 825+ (4*165)= 1485 Cash flow
End year 5: 1485+ (12*165) = 3465 Cash flow
Option 2 Loan- Present- 825 cash flow
After refinance: (825-300) = 525 Cash flow
End year 1: (525+825 new property)= 1350 Cash flow
End year 2: 525+525+825 = 1875 Cash flow
End year 5: 1875+1575 = 3450 Cash flow
So after 5 years option one you have 21 properties making 3465 month cash flow. With option 2 you have 6 properties making 3450 month cash flow, not even including the equity pay down from the loan, or the time value of money, and the fact that you get 100% of the appreciation instead of 20% like with option 1. So lets say all properties appreciated 1000 at the end of year 5. Appreciation for Option 1: 1000*21*.2 = 4200. Appreciation option 2: 1000*6 = 6000.
Personally I would choose option 2, but to each his own.
@David Grabiner Except that you conveniently forgot about the closing costs on all of your loans. Where does that cost come from, and where is it in your totals over those 5 years?
Your Option gives you two choices to cove the C.C., either rolling it into the loan (assuming you can add that in) this will add about $40 to your monthly pmts (and reduce your CF/m the same...which would now equal only $485/month (485*12 = $5820/yr)...or, you can pay it out of pocket. Assuming your $36,000 loan, and 5% c.c., that would reduce add an out of pocket cost of $1,800 per deal, so your first year C.F is now only $8,100 at years end (assuming that's when you will refi).
My Option, the closing costs are....wait, I have no closing costs, so my remains at $825/month or the same $9,900 at 1st years end, and a new $7,920 added every year after that.
Let's look at the totals after 5 years with each option now.
Your Option (paying for C.C. out of pocket):
$ 8,100 Year #1
14,500 Year #2 ($525*12=$6,300; $6,300+8,100 = $14,500)
20,800 Year #3 ($6,300 * 2 + 8,100 = $20,800)
27,100 Year #4 ($6,300 * 3 + 8,100 = $27,100)
33,400 Year #5 ($6,300 * 4 + 8,100 = $33,400)
$103,900 TOTAL
Your Option (paying for C.C. rolled into loan):
$ 9,900 Year #1
15,720 Year #2 ($485*12=$5,820; $5,820+9,900 = $15,720)
21,540 Year #3 ($5,820 * 2 + 9,900 = $21,540)
31,440 Year #4 ($5,820 * 3 + 9,900 = $31,440)
41,340 Year #5 ($5,820 * 4 + 9,900 = $41,340)
$119,900 TOTAL
My Option (NO loan, NO C.C.):
$ 9,900 Year #1
17,820 Year #2 ($7920 + 9,900 = $17,820)
25,720 Year #3 ($7920 +17,820 = $25,720)
33,660 Year #4 ($7,920 + 25,720 = $33,660)
41,580 Year #5 ($7,920 + 33,660 = $41,580)
$128,680 TOTAL
I am not impacted from any:
1 - Loan approval conditions, restrictions or costs. I have no cost to my money.
2 - I can achieve my end game in pieces. I can do this with more than one new Partner coming in...at different times.
3 - I don't rely on the bank's approval.
4 - I'm not restricted to the 75% - ? LTV the bank refi terms dictate. If I want to do only 70% (I got a great deal) I can. If I want to do 90%, and get cash out I can.
5 - I have no seasoning period.
6 - I have no equity paydown needed. I have 100% equity from the start since I have no loans to pay down.
7 - At no time do I have a lien on the property, unless...
8 - If I/we decide to refi at any point down the road to take advantage of equity, take cash out, get all the partner's cash back, etc...I still can.
True I didn't include closing costs, so are you saying setting up individual LLC's and creating partnership documents is free for you?
Also you made a slight error on your calculations under the Refinance section
End Year 1 should be 9900 + (6300 - 1800 closing costs ) = $14,400 not $8100 as you listed.
End year 2 = 9900+6300 + (6300-1800) = $20,700
End year 3= $27,000
End year 4= $33,300
End year 5 = $39,600
For a total of = $135,000 from 6 properties
Your way gives a total of = $128,680 from 21! properties
So even with closing costs added it it comes out a head assuming that you have no fees associated with your contracts and LLC creations. Plus you would have much less units to manage and be making more money. I agree you that your has several advantages as you have listed and I'm not trying to convince you to change how you do your business. I am really writing this so others who read it can see that your way requires you to have a lot more properties and doesn't necessarily provide more total cash flow in the first 5 yrs. If it was me and I could choose I would choose $135,000 from 6 properties over $128,680 from 21 properties.
LLC's are $25/year in Michigan
When you refinance, it's at the end of the 1st year, so it comes off of the 9900
@Joe Villeneuve In my example I stated the first property had already been sitting for a year so could be refinanced immediately, because I was discussing this as if it was for someone who had the properties and was deciding between refinancing and and your strategy.
Do you not pay anyone to draw up the partnership agreements?
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