Low low interest $5m loan... Now what?!

13 Replies

Long story short. I have a duplex rental and a single family house. Getting divorced and the wife gets the house, I get the duplex as far as assets.

I am an architect during the day and have been doing high end and deep remodel/additions at night. I typically aim to make at least $100k per flip.

I love flipping but it was an always a means to buy more rentals. Buying rentals in the Utah market right now is hard with the high purchase costs so I have yet to buy more than my duplex.

However, I found a loan with less than 1% interest that I will be closing on in about two months. My question is what would you do given my scenario? Right now I plan on doing a few flips simultaneously but I'm torn on what to do about the rentals and how to maximize my loan over the 7 year term.

Do I pay off my current properties and find good deal properties and pay cash up front? Or do I find the good rental deals and finance them with loans to keep my equity?

My ideal situation is to pay back the entire loan and interest over the 7 years as well as having a minimum of $20k/month in cash flow.

Curious to hear what you think I should do or what you would do if I were you! Go!

@Drew Whitehead

I think the biggest opportunity is in 30-100 house portfolios, local owners who've had them for 20 years and are near the end of depreciation. With a $3-5M loan you're perfectly positioned for that kind of purchase at 75% ARV. 30-100 is bigger than the average Joe can take down, and smaller than a Big Outfit wants to deal with. Property management will be very interested to do a good job and give you a lower mgmt fee. That's your niche.

@Drew Whitehead if you're under 1% on the loan, I guess part of the opportunities would be determined by the term of the loan as well (how soon do you have to pay it back, does the rate adjust, is there a balloon pmt, etc.). But I was just looking at my Utah County portfolio numbers ant they're returning 10.2%. Not amazing compared to some posts on BP, but for me, it's great and I'm happily keeping up with my Fundrise investment return.

My question is, if you can find portfolios or any investment that returns more than 1% (almost everything besides a regular savings account), why wouldn't you invest and leverage that amazing debt to increase your assets in any way possible? I definitely wouldn't use it to pay off your duplex as long as it's a cash flowing property with debt service in place. 

I was looking at newly developing apartment complexes up in SL county and was kicking myself that I didn't have 200k to invest - returns were at 14% with current tenancy, and projected to be 25% once all units were complete. With enough cash to invest, I would definitely look at multi-family - check out the FIG group here (fig.us) as an example, we've been communicating with them as well as an option for our future investments.

If you're willing to share, I'm sure all of us would be interested in your financial source of such an incredibly low rate loan!

@Drew Whitehead , I am with Drew Sygit: more details, because I would happily take this loan too.

I think this all comes down to deal flow and the actual terms of the loan.  If you have to repay the loan in the near-ish future, and your property is supporting the existing loan, I would not pay off the existing loan.

In the current hot market we are in, I do not see rentals as the way to go.  As you mentioned, they are all overpriced.  If you have a steady pipeline of flips, this could be a good way to take advantage of those, and even if you have to hold on to a couple while finishing others, I see this as the best way to grow your net worth in todays market.

I would also look at using that loan to become other people's private lender (although this can be just as bad as being a landlord sometimes).  If you can borrow at 1% and lend at 10-12% plus fees.

@Frank Hinck that is an interesting idea. I'm not sure how to find someone that is selling their entire portfolio?? I can start the conversations with other investors and realtors though!

@Drew Sygit this is more of a private loan that he doesn't offer to just anybody I guess... If he branches out I will let you know!

@Duane Richards & @Evan Polaski , the loan is seeming a little less appealing as I have to pay interest and principal each month so the payments would be around $55k every month. I could essentially pay for the payments with the loan itself until I get the cash flow up but tackling $55k of cash flow per month is tough with todays home prices... The loan is essentially closing in on itself every month you have it. So unless I balance it out with income and cash flow it will slowly dwindle... 

I also have to put a pretty hefty downpayment so unless I could buy a portfolio up front for a great deal and remodel and bring the rents up quickly to stabilize the loan payments, I'm not sure it would work. Unless I use the loan money to ramp up my flipping game and purchase rentals with the income from the flips? Basically using the loan to fund my flips but I won't come out of the 7 year term with $5M of equity. 

It would help me get out of my day job and really focus on REI full time like I've wanted to for a while though...

Interesting @Drew Whitehead - Portfolio purchases would be one way to potentially capture the cash flow, but 55K/mo is a steep bill. I've seen a few for sale through the Utah REIA, but they're all out of state. There was an 8 home one up for sale a while back that had really decent cash flow, but the price was a bit out of my reach, and wasn't sure I wanted to dive into Kansas City, MO just yet.

You could always keep an eye on BP marketplace to see if anyone is looking to sell, otherwise, if your flipping can manage to pay back the loan, it would be a good way to go.

There is portfolios out there that size. Not super common but you just need to connect to find them. One example is I was cold calling and an investor had 10 duplexes and 68 SFH he wanted to dump out of his portfolio, he wanted to focus on only large multi. Just need to connect with people and see what happens. You'd be surprised the opportunities that come up when you focus on finding them

@Erik Carey I have not considered that. My knowledge on syndication deals is very limited so I wouldn't know where to start. I will be doing some research on this. Especially if the cash flow could be high enough to offset the initial investment!

@Drew Whitehead Syndications are when investors pool their resources to acquire larger assets. The syndicator or sponsor, as they are often referred to, finds the deal and acquires the mortgage debt while the other investor or investors bring the capital. A property manager is put in place to handle the day-to-day operations while the syndicator maintains responsibility for keeping the growth of the asset on track and managing distributions to the passive investors.

This is a basic framework of the structure. Send me a DM if you want to learn more.