?How do I keep growing after hitting debt limit? Calling a veterans!

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How do I keep growing after hitting debt limit? Calling a veterans!

I'm a young investor who owns 16 SF properties around Houston. I think I have hit my debt limit(atleast till I prove my self to the bank). I have about 150k in cash.

Now the question:

What do you think I should do to continue to growing?

This could also really help novices. I am sure every veteran investor has hit this wall before; and it's one of the least talked about things that everyone needs to know.

@Michael Ran   It depends on what you mean when you say you have hit your debt limit. That could mean it is time to slow down and reposition yourself to be more financially stable. Or it could mean that you are saying you have hit a wall with financing. If the latter, there are many options out there. Owner financing is one that can be pursued. Private lenders are another. If you have acquired 16 properties, that will be enough to impress most private lenders and indicate that you know what you are doing, though that may or may not be true ;) Talk to people you know. Always be "in business mode" when having conversations. 

If you have reached a limit where you can't get any more financing via conventional sources you could seek a commercial lender or get a blanket loan to cover all your properties.  You can also consider paying off a few properties to free up your credit.  I am assuming that you are getting good cash flow across your portfolio?

Get to know some of your local bank's loan & finance guys.  I made a trip through a few of my local banks one day & got different answers out of each one.  A few of them were open to offering one loan product to cover my portfolio.

Partners with credit.  You will need to share the returns with them, but if the returns are high enough to satisfy you and a partner, you can continue to expand using credit partners.

Joe Villeneuve
REcapSystem
A2REIC

@Michael Ran  

A blanket loan may be the best fit, now if you have all your 16 properties payed off, a cash out refi should help on lowering your DTI.

Hi there, congrats on your 16 properties. I would refi cashout your 16 properties. you are going to be responsible for the loan but credit score is a factor. they want to see that the properties are cash flowing. the max ltv on a cash out would be 75% rates depend on property type range would be 5 - 9 depending on location, debt service, credit but it gives you an idea on how much money you can get out and how much you can expect to pay for the money you are taking out. hope this helps pm me if you have more questions. good luck. 

Originally posted by @Alan Vieyra :

@Michael Ran  

A blanket loan may be the best fit, now if you have all your 16 properties payed off, a cash out refi should help on lowering your DTI.

A cashout refi would actually increase DTI unless you're going from a high interest and/or low amortization loan to the opposite. Apples to apples, more debt will raise the DTI and a cash-out refi represents more debt.

Medium logoMichael Seeker MBA, Renting502 | http://www.Renting502.com | Podcast Guest on Show #94

I already have a commercial loan covering my properties. Refi would not be worth it or help the DTI @Michael Seeker  and I have set appointment to speak with several other banks.

I can find deals but most of my deal contacts are big deals that I don't have the cash or the loan ability to buy and flip. Which is how I got started. Helping other people find big deals and get a little fee, have them guarantor credit to my loans, or a house. I also manage properties for a few investors. But they are slowing down(risk reasons).

I have been thinking about flipping but fear the risk as this is the only money(150k) I can use for them. I could buy a house cash which would make my asset to debt ratio look better. But then I have to wait for enough money to do anything else. Also, that is all the reserves I have for major repairs on my houses.

Is it time to stop and wait or can I still grow and just don't see it? I know there is a time when you have to stop and start paying down debt but prices are really high in houston. I don't think its a good idea with these prices to sell everything and take profits to start again.

@Michael Ran Congrats on the 16.  

Private money lending or Hard money lending. You do not have to flip properties to make money in REI. If you have a lot of deals flowing in just wholesale them or JV them. There are a lot of investors in the Houston area. Do you have a buyers list?

@Greg F.  Thank you. It was hard to prove myself to people but I did it!(then I find BP after...)

Hard money has to be refinanced so that won't work.

No I don't have a buyers list. Well the one I have is drying up. Some of the deals I get are too big to wholesale for this reason. I don't have the cash or loan ability to cover the unwanted houses or someone backing out. I don't want to get a reputation for deals falling through or breaking my word. The last few deals I have seen were in the 30-70 houses range. I don't have that kind of money( yet! ).

Plus the deals I hear about require fast reply and fast closings. The last 34 house deal was a wonderful 60 day closing. But they are normally short so I would not have time to shop it.

To me the answer seems joint venture partnerships.  Once established they provide cash to move quickly.  There is a bias against sharing profits among the small investors here on BP but to me that is short sighted.  Virtually every large investor in every area of investing got big using other people's money and keeping a smaller piece of a much larger pie.

Originally posted by @Eric Michaels:

To me the answer seems joint venture partnerships.  Once established they provide cash to move quickly.  There is a bias against sharing profits among the small investors here on BP but to me that is short sighted.  Virtually every large investor in every area of investing got big using other people's money and keeping a smaller piece of a much larger pie.

 Don't stop there Eric.  Every great business has been based on sharing and teamwork.  We need to look no further than the assembly line for the ultimate example.

Joe Villeneuve
REcapSystem
A2REIC

Keep shopping for a portfolio lender or a diffferent business lender if yours has put the breaks on you.  If you have 150k in cash, every one of your 16 properties is solidly cash flowing, credit score is good and your next acquisition will cash flow too... you can find a lender.  Work on finding a lender like it was a full time job.  Write a professional looking business plan (get professional help if necessary) with a full break down of each property and be able to present it (sell it) to the lenders like a polished professional investor.   Practice in the mirror.   Know the answers before they ask.  If you fail, figure out why and make the next presentation to a lender even better.

@Brant Richardson  thank you.

I have meeting set next week to talk to a few banks. 

@Joe Villeneuve  I would like to set up a buy and breakdown assembly line for big deals like this. I just never got around to it. I am aslo going to meet with a few hard money lenders and see if they would be interested in this type of thing.

Michael, not that I've done it because I am not there yet but from my understanding you could try multi-family (5+ units). With $150k (20% of $750K) to play with and a good history of property management i would think you would qualify. From what I've read and heard, financing on multi-family is based more on the projected performance of the property than that of the borrower. hope this helps. good Luck!!

Originally posted by @Michael Ran:

How do I keep growing after hitting debt limit? Calling a veterans!

I'm a young investor who owns 16 SF properties around Houston. I think I have hit my debt limit(atleast till I prove my self to the bank). I have about 150k in cash.

Now the question:

What do you think I should do to continue to growing?

This could also really help novices. I am sure every veteran investor has hit this wall before; and it's one of the least talked about things that everyone needs to know.

 HI Michael,

Being in the position I am in I believe the reason for investors who hit this so called "wall," is because they focus on acquisition of assets not focusing on what the bank focuses on which is a the personal financial statement.

If an investor can optimize their assets, liabilities, equity, and cash flow then they can get as much money from banks as they want.

Lenders in the 10+ space generally look at debt service coverage ratio for the property, global debt coverage ratio, and net worth.

Example:

Global debt coverage ratio -  passive income $10,000 per month versus all expenses and net liabilities $2500  =  4.0x cash flow

If a borrower had a high global cash flow and a high net worth then getting loans is easy the problem is most REI's dont focus on designing their PFS ahead of the actual financing need.

By preparing your PFS ahead of time you're in essence telling a business/commercial/portfolio lender that you "get it," and can manage cash flow/networth and have done your homework on risk analysis as well. 

Bankers will talk about doing stress tests at highers rates, shorter amortization periods, add shock factors to the payment to ensure you can qualify even in hypothetical hard times. They will also add in hypothetical property management costs when you might "self manage," capital expense reserves, factor in annual repair costs when you had $0, and a slew of many other conservative adjustments. The best way to combat these is to have such high "cash flow," on the PFS that you can debt service the property you're looking to buy even despite worst case scenarios.

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453

@Albert Bui  Thank you! What would you advice I do to bring up my global debt ratio, cash flow, and making my PFS look better?  Buy properties a few properties cash? Buy dividend stocks in the LLCs name?

@Michael Ran

HI Michael, 

As with anything its a balance you'll have to find where you're comfortable with between your tax deductions and net cash flow that shows through your financial statements.

Feel free to PM me if you have any questions.

Medium new american funding logo  Albert Bui, New American Funding | [email protected] | 949‑514‑5106 | http://albertbui.com | CA Lender # 345453, WA Lender # 345453, TX Lender # 345453, TN Lender # 345453

Please explain what you mean by debt limit. Every bank has a legal limit as to how much they can lend to any single investor. The formula is something like 25% of tier 1 capital + loan loss reserves. Thus larger banks can loan more than small banks to 1 person/entity.

With 16 houses having loans around $100k each even a small bank still has room to loan to you.

But if you saying the bank wants you to slow down your growth then thats a different story. At this point I would ask them what parameters they want to see with your portfolio to allow you more borrowing power. Then exceed those parameters making it easy for them to get your deals approved.

I have to imagine that with 16 houses you should be able to get some type of LOC to float you thru the time from purchase to end loan.

@Chris Adams   I think the bank is looking more at my Debt. Cash flow is good but a young/unproven investor with a million plus in debt will pause any banker. I know they have funds for future loans. 

I wanted this to be more of a discussion of how other people proved themselves to banks and how they solved growing pains like this. Examples: 

I could sell everything and restart with higher quality, flip groups of properties, or buy MF properties.

I could payoff a few properties to increase my overall cash flow to debt ratio.

I could buy owner financed properties.

I could do things to make my PFS look better to the bank.

I could do JVs with others and use their credit and grow.

What have you done or do when this has happened to you? I am looking for all ideas and thought on the best way to keep growing.

In order for someone to give you specific information on this scenario beyond what has already been posted we would need to know all of the details of your portfolio and how it is currently structured. 

Terms of all current loans, including loan balances and property values.

Total cost of ownership on each property along with rental income, then break all of this down into a spreadsheet showing DSCR for each property and the total for the portfolio.

Combine this information with a global DSCR and thats what the bank is looking at.

My guess is that your age has less to do with this situation than you think. Look hard at the numbers that come from analyzing your portfolio. 

Its also possible that the bank itself is trying to position its portfolio in a different direction than your goals. Once you get your numbers together start strengthening the portfolio and shopping new banks.

Going back to the blanket loan option. I did some research & most lenders want the loan to be to a LLC. This means that you would have a single loan to a LLC and not your personally. You would have to transfer title of all your properties to the LLC but you would free up your personal credit. You could then start purchasing properties using your personal credit again & once you max out roll everything over to another blanket loan.

Originally posted by @Michael Ran:

How do I keep growing after hitting debt limit? Calling a veterans!

I'm a young investor who owns 16 SF properties around Houston. I think I have hit my debt limit(atleast till I prove my self to the bank). I have about 150k in cash.

Now the question:

What do you think I should do to continue to growing?

This could also really help novices. I am sure every veteran investor has hit this wall before; and it's one of the least talked about things that everyone needs to know.

 OPM! OPM! OPM!

Other People's Money!

Equity partners, owner financing, hard money loans, self-directed IRAs, etc. Nobody cares about your credit if you don't use your credit in the deal.

50% of the next deal is better than 50% of zero!

@Will Porter  Well said.  Partners are the answer.  This is how we have access to an unlimited number of deals...and financing for those deals.  Credit partners, and cash partners if that's their investment strategy.  

Like you said, "50% of the next deal is better than 50% of zero!"

Joe Villeneuve
REcapSystem
A2REIC