Funding Downpayment/Loan options using existing properties

[Katherine Bremner]

Hi BP Friends!

I’m a new(er) investor in Wisconsin in need of some advice on how best to fund an off-market 8 unit (long-term). Purchase price 700K.

A little about me: W2 job (160K), credit score 800, ~600K in 401K. 3 duplexes nicely cash flowing at 500+/door in Wisconsin, 3 other cashflowing properties in Illinois. All of the investment properties have 30yr mortgages with low interest rates (3.25-4.50), three units have been renovated (one was a major update/full gut), so I have some equity I can pull out. Properties were all purchased within the last 2yrs. No commercial loan experience. My preliminary numbers have DSCR at 1.23%

Question: How best to fund downpayment? Should I cash-out refi a few of these properties? Should I borrow from my 401K? Is there a loan product that I can combine mortgages and cashout (cross-collateral?)

Thank you!

[Rebecca Knox]

Contact Mike Danielson at Waterstone Bank

[Marcus Auerbach]

First choice is always to leverage the subject property. Your seller is likely an educated investor which makes a discussion about seller financing much easier, they know about the tax advantages etc If you can come up with 10% down, the seller can take 10% or more in a secondary note and the rest you can fund with a commercial loan.

Second option is a HELOC on your personal home, easier to get and lower in cost than lending against investment properties. Secondary loans on rental properties are tough, especially if the 2nd position lender is a different bank than 1st. And you don't want to give up you 30y loans.

Third option is to raise private money, preferably family money. Stock market does not look great and a lot of people like real estate, but don't know where to start. It can be savings, but you can even use someone's 401k. Family trusts you and know your abilities and personality. A lower rate like 6-8% is usually fine, if you offer a higher rate, people assume the risk is high, so actually counter productive.

I am normally an advocate of smaller local Milwaukee banks like Waterstone, Equitable, Waukesha State or Washington State Bank, but at the moment credit unions seem to have the best commercial rates.

[Carlos Ptriawan]

There's problem in your assets, depending how much you put your down for these CF-property, your equity LTV position may only increase 6-10% since you acquired the properties only two years ago, for cross collateralization I guess the bank want to see if max CLTV in all properties has reached at least 65-70%LTV. Your strongest asset is def. 401k ; but you could take only up to 50k for 5% 401k-loan. Don't cashout your 401k as stock market is still rallying, the best time to take 401k loan is when the stock market is at bottom.

For scenario like this, you need to run five to six what-if scenario by calculating the actual asset value divided to 75% LTV. So you could do cross collaterization  from multiple assets (which may ate your CF), cash-out refi or sell-buy same/multiple assets.

But I guess, the output number would not be so favourable for you becoz:
1. you would reduce your CF quite heavily
2. you would increase your leverage without too much benefit as interest rate is higher 
3. bank would be fine to lend you money as it's free money for them, but whether it is the right move, I would calculate again in the excel sheets 

[Dennis Nguyen]

Since you purchased within the last 2 years I'm going to assume your interest rates on the properties are pretty low. I would look into a HELOC for your properties to pull out the existing equity without changing your rate. Otherwise - if your rates were already high you can do a cashout refinance.

[Hamlet J.]

Hi @Katherine Bremner, 

Since you have some cash-flowing properties, I think it is not a good idea to touch your 401k for now. Maybe, you can explore the option of cash-out refinancing on one or more of your properties. This allows you to refinance the existing mortgage(s) and take out additional funds based on the equity you have built up. Consider the costs involved in refinancing and compare interest rates to ensure it's a financially beneficial option. Another option for you can be cross-collateralization. 

For instance, you can investigate loan products that allow cross-collateralization, which could potentially combine mortgages and cash-out funds. This may provide flexibility in using equity from multiple properties to fund your down payment. Consult with lenders who offer such products and evaluate the terms, interest rates, and associated risks.

Remember, each funding option has its own advantages and considerations. Thus, I know that there are a lot of items to consider, but if you can try not to touch your 401k until it is REALLY necessary. 

Best wishes in your Journey. 

Hamlet

Investor in Connecticut. 

[Jonathan Klemm]

Hey @Katherine Bremner - I like the idea of borrowing on your 401k or a Home Equity Line of Credit over a cash-out refi, given current interest rates and market conditions. 

Also, another great option might be to self-direct your 401k instead of borrowing against it.  If you have a partner you are close with that can be a great option. 

If you are considering investing in Chicago happy to make some connections down here for you.