New Investor with money, background, need strategy advice

Creative Real Estate Financing
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New Investor with money, background, need strategy advice

Michael R.
Tuckahoe, NY · Member since 2013 · 28 posts · 6 votes

Hi All! I am new to the site… I do not currently own any investment properties; however I am plotting my entrance into the market. A quick background; I am a CPA investing with my dad who is a residential realtor. I setup an LLC, EIN, and we're preapproved for any range of leverage within our price range.

Now my question(s): We are investing in the NYC metro area (Westchester/Bronx), where home prices are high, and so are the rents. My question is regarding a financing strategy for the 1st home, which will begin to shape future purchases. I am currently deciding between 30-40% leverage on the 1st property (2-4 units) or an all cash purchase. Obvious plus to leverage is that we'll increase our Cap Rate using relatively low interest rates; however we'll lower our cash flow. If my plan is to purchase a 2nd home within 1-1.5 years of the 1st home purchase, would a leveraged purchase of the first home or an all cash purchase make more sense? The confusion I have is regarding utilizing the equity on the 1st home to buy the 2nd. Are Home Equity Loans the only option I will have, and if so is it possible to get a fixed rate Home Equity Loan on an investment property listed under an LLC? Are there any other options available and would leveraging a partially financed property hinder me from getting a Home Loan (aside from the fact that the loan would inevitable be smaller due to the lower equity). Any help would be appreciate…Thanks!

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  • Timothy Javins
    Seattle, WA · Member since 2013 · 21 posts · 0 votes
    13y

    You're thinking about funding options and I'm thinking about your liability options.

    Since you're talking about consumer-oriented loans, I'm assuming you're going to sign for the loans in your own names. There goes a big chunk of the benefit of doing business under your LLC.

    I say buy the first one cash in your LLC's name if you're absolutely sure you have a winner. It's foolish to put all your eggs in one basket, though. And rather than going for home loans, I say look for investors that will loan to your LLC without your having to co-sign. Just spend time during your 1 to 1.5 years to make a kick-*** business proposal and shop it around until you find the right people to do a 1031 (tenant-in-common) kind of situation. There's your leverage and your liability protection is still in tact.

    When it comes time for your second property, you could do the 1031 on your first property to free up some of the cash you put into it, or you could take your rents and put them into a self-directed IRA, which you would then use for a chunk of your portion in a 1031 deal with the second property.

    How's that sound?

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Welcome to BP, Michael and Timothy.

    Michael, you say buying your first home, not sure if you mean your home or your first investment property.

    Leverage is a personal use of cash thing. You just need to consider alternative investments and uses of funds, but usually starting out you'll put 20/25% down and finance the deal. Rates are very low now, so even if you have the cash, you should probably use financing to the fullest extent as your money in hand is probably worth more. If you get a higher rate than you are paying, the best is to use your money and be in a position to payoff obligations if needed.

    Look at the cash on cash return and ROI, don't get tied up with any CAP Rate, to many ways to look at any CAP Rate and most likely, it's inaccurate financially and economically for a private RE investor. It may be a quick consideration to look at a deal but not to base your buying decission on.

    Home Equity loans are for owner occupied/second homes, not investment properties, but it is possible to get second mortgages with the right lender. Investment properties are very hard to pull cash out of, another reason to leverage such deals, you can always pay them down. Another issue is time, to get cash out you will need to be in title over a year, usually.

    After you hold properties long term, you might use the equity in other deals, several ways to do that without refiancing them with blanket mortgages on investment properties, but usually you won't build equity fast enough to move on to another property.

    Good luck... :)

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  • Michael R.
    OP
    Tuckahoe, NY · Member since 2013 · 28 posts · 6 votes
    13y

    Thank you both for taking the time to respond

    Timothy: Thanks again... Regarding LLC benefits, isn't most of my protection from the tenants as opposed to the bank? The loans themselves will be under the LLC, however the 2 LLC members will be signing as guarantors. We're using the loan as a means to increase our return on our down payment, not necessarily because we don't have the money to cover it.

    Bill: Thank you. I should have been more careful with my words, thanks for keeping me honest! By home I meant investment property (I will not be living there/100% investment). I may have loosely used my words here but when I said leverage, I was referring to mortgaging a portion of the property in order to use less of my money and hence increase the return on the cash down payment. Also, I should not have used Cap rate... I look at the return based on the (1) return on sale price (net rental income/sale price), (2) return on down payment ((net rental income - interest expenses+principal+appreciation)/down payment) as well as the same calc where i add the increase in equity to the denominator. I'm still confused about my options regarding my equity. If the house is bought outright, with no mortgage, you're saying that It will be difficult for me to take a loan out against that property to buy another? If home equity loans are not an option, how to people that buy small residential properties (2-4 units) utilize their equity to buy additional properties WITHOUT selling the initial properties? And if you're saying I won't build equity fast enough to use the equity in other deals... why not buy it outright and then use the equity to buy a second property?

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