How Does A Guy With No Debt & Sizable Assets Get A Loan?

Question

Hello everyone.

My wife and I have just formed a 2 member LLC.  It is our intention to buy residential single family homes as investment properties to generate cash flow.

It is my intent to use my home which is completely paid off as a Home Equity Line of credit to purchase homes and then once I am done, roll that over into a fixed rate 30 year mortgage on my home.

I bounced this off of my investment advisor, lawyer and accountant and they all agreed that it was the way to go.

I called Schwab today to get the ball rolling.  They are offering 3.99% financing on Home Equity Lines.  I described my situation, and once I brought the LLC into the conversation, they said they could not help me because they would in effect be providing capital for a business.

I was/am flabbergasted.  Am I going to run into this with other institutions as well?

I would greatly appreciate advice from someone on how to get started given my financial position.

Thanks,

Bob

Chris Masons · Answer

Hi Bob,

If you are getting a HELOC on your primary residence why does your LLC come into play or need to? Is your Primary residence held in your LLC? If not you should be able to secure the funds as usual and at that point you can use those funds to aquire your SF investments.

Am I missing something?

Bryan Hancock · Answer

The problem is that you are seeking the wrong loan product.  The HELOC you were requesting information about likely was only for non-business activities.  A small regional lender would be happy to lend to you if you put your free and clear house up as collateral.  The loan terms won't be as good as what you could get with the other product, but you will still have access to cash.

What types of residential product are you looking to purchase?  Will these be distressed deals?  Value add?  Small projects that will cash flow well?  New developments?  A lot depends on what you are trying to finance.

Bryan Hancock · Answer

Ahh...I see.  I thought you had figured out how to have your cake and eat it so I thought I would ask.

The liquidity debate is still one I haven't seen good answers to on the board.  It has been asked a number of times in a number of different forms.  Nobody seems to ever focus on this for their portfolio.  Everyone seems to be equity constrained quickly enough to limit themselves from growing too quickly.  The one exception I have seen for this are those that purchase subject-to and throw caution to the wind with regard to leverage.

If anyone knows of good measurements for proper liquidity ratios it would be excellent if we can see what you use.  From this post it seems that the OP is not leveraged enough.  These question is...what is too much?

Joel Owens · Answer

Ha,Ha............. LOL

Yeah when I multitask things run together. :)

You know what I mean..

Put as little down as possible and pursue value add deals to increase forced equity and then refi out later on.

I don't like the houses versus commercial because everything is the comparable sales approach.I like commercial with the value add income approach.

Bryan Hancock · Answer

How does one do this Joel? :wink:

Joel Owens · Answer

If you are a developer then I wouldn't go after SFR I would go after multifamily.

So after about 5 houses you would run out of money??

I would try to put your cash to work and stay as liquid as possible.

Bob Riedlinger · Answer

Thanks Bryan!

Bryan Hancock · Answer

I think you can likely get a big enough line to do one deal at a time with it.  You can buy using the line of credit to get the best possible price using all cash and no financing contingencies.  You can then park some of the line's cash in the rehab, stabilize with tenants, season, and refinance on a FNMA loan.  The FNMA loan will free up your line to rinse/repeat.

See if you can get some introductions to local small regional banks.  The appetite for loaning on small residential rehab projects is pretty low from what I have seen, but with a large free and clear piece of collateral I am sure you can convince someone to lend you money on reasonable terms.  Unfortunately I think you will only get terms good enough to do one project at a time, but that probably isn't a bad thing if you are just starting out.

Bob Riedlinger · Answer

It's in the high six figures

Bryan Hancock · Answer

How much is your free and clear house worth if you need to pledge it as collateral?

How Does A Guy With No Debt & Sizable Assets Get A Loan?

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