Conventional to DSCR Loan: Am I Crazy?
Goal: Restructure existing debt, keep payment around the same, pull cash out for reinvestment purposes (thereby increasing LTV).
How: DSCR loan / portfolio loan. Open to other ideas here, too.
Current Situation: I have 5 SFRs in Memphis, TN, each on 30-yr fixed rate loans. Weighted average interest rate is right at 5.00%. Purchased these turnkey properties initially with 20% down (and got these loans) in personal name, had title company quitclaim to SMLLC. Let's save the due-on-sale for another discussion. As we all know, we're experiencing quite a bit of price appreciation (even in markets like Memphis, which aren't historically known for it). I'm considering restructuring the debt on these rentals and pulling some cash out.
My local credit union that I have a relationship with (and do my business banking with) does not lend on property outside of KY. I've been in contact with a couple of commercial brokers from BP and they have some interesting products, including 30-year fixed loans with similar/lower interest rates to what I have (depending on LTV, etc.). I could potentially kill all the conventional 30-year fixed Fannie/Freddie backed loans and wrap it all into one DSCR loan or portfolio loan made to my SMLLC. Seems like a no brainer, but I'm finding the fees/costs for these loans seem quite high (in the five figure range - like $10K-$15K).
Depending on the LTV, I could probably get anywhere from $50K to $100K out (wide range, I know). Total loan size would be in the $350K-$450K range. With one lender, the fees don't change (need to check with the other one - waiting on a rate sheet from them). My total PITI payment would be +/- a few hundred per month depending on which route I go. These funds would likely be reinvested into a self-storage/mobile home park fund.
As a side note, I am also in the process of getting a HELOC on my primary where I could likely get about $65K-$70K (promotion w $0 closing costs, variable rate right now at 3.50%). This seems like the cheapest cost of capital by far, however, it doesn't really address the built up equity issue with the rentals (my SFR portfolio is sitting at about 55% LTV right now, and I'd like to see that higher).
Bottom Line: I have excellent credit, strong income, and am very "bankable." From what I told, many people that get these types of loans are either "Fannie/Freddie'd out" or they don't have much (if any) documentable income (and therefore the fees are quite a bit higher). I'm trying to figure out whether or not it makes sense for me to move forward with one of these products. Am I crazy to do it...or am I crazy NOT to do it...? Just feels a bit silly to pay $10-$15K to "get" $50K-$100K when I don't "need" it necessarily. I've always heard your 30-year fixed Fannie/Freddie loans are like gold, but these DSCR loans seem competitive from an interest rate/term standpoint.
Downsides: The only potential downsides that I'm aware of besides the fees are that if I ever wanted to sell just 1 or 2 properties, when those sales close, the proceeds go towards the outstanding principal balance on the loan (I don't get the cash). There's also a prepayment penalty for the first few years (which doesn't really bother me as these are intended for long-term buy and holds). I'm sure I might be missing something here, not sure...?
Positives: On a positive note, doing this would free up 5 conventional loan slots for future acquisitions. My interest rate would be lower (likely around 4.375% to upper 4s depending on LTV). I'd have more cash NOW to reinvest. I would increase the LTV on the portfolio and keep that money working. Once completed, everything would be in the name of the SMLLC (properties, loan, etc.).
Sidenote: I did talk to my residential lender about a possible refinance. He quoted $3,300 to refinance ONE property, 0.50% lower rate, cash out. So, on a relative basis, maybe $10-15K isn't so bad considering if I did them all individually, I'd be paying around $16.5K.
What do you guys think? What am I not considering? What other info might you need to share your thoughts? Thanks in advance.