4 Properties and no cash, now what?

Question

Hey Bigger Pockets, this is my first post and I'm a new(ish) investor looking for some insight. I have always been a diligent investor and recently focused on real estate thanks to BP. I just recently made the decision to start an LLC, and I have 3 condo's that I own outright I'll be transferring into the LLC. I have a 4th condo with a partner that will remain outside of the LLC, all of them rent for $1,400 and I own them outright. I purchased them all this year and everything has gone great, I do all the renovations myself and manage them myself. I'm interested in scaling up and looking at bigger, multifamily properties... However I spent all my money on the condo's and while financing for other properties is available most require 20% down which I no longer have. The condo's produce excellent cash flow but even at $4,900 gross income monthly it will take a long time to come up with a sizable down payment for more units. My biggest hurdles right now are money for downpayments, and I know there are several lenders that will do cash out refis but I'm trying to find another way, and not having history as a business since I just started my LLC... Would love to hear from someone a few steps ahead of me how you handled these challenges, but all advise is greatly appreciated!

Joe Villeneuve · Answer

Sell the condos, and start all over again only using 20%.  You're losing money if you paid all cash for these units.

You doubt it?  Here's your mission, should you choose to accept it.

Calculate the following:

1 - (Cash flow per month as is times the number of months you've held the property so far) minus the cash you spent on the property = A2 - A divided by your cash flow per year = B

A = the total dollars you are at a loss so farB = how many years it will take you until you have recovered all of your cost...and start making a profit.

Now, do the same 2 formulas, except this time calculate it as if you bought the properties using only 20% down...instead of 100% down.

John C. · Answer

@Bryce Shipley

Bryce,

I think you are in an excellent position.

You're cash flowing

You own the properties

You owe nothing but insurance and taxes

The market can bust away, who cares, you own them.

The rent market can drop, assuming you will still be able to hold insurance and taxes, you should be fine.

You own them......to me this is a safety net a lot of people don't have starting out.  They are taught to leverage, leverage leverage......and don't understand the risk.

In my opinion, you are very close to being able to leverage safely with less risk.

One thing you can do (keep your partner out of this transaction) is take the three deeds you have, find a local bank willing to work with you and leverage the deeds into a line of credit.

Chances are it will be interest only loan, but you will have cash available when needed to purchase additional properties or for emergencies.  Be sure the net rental income covers any loans you have until you can pay back in full (another deed in hand) or you can refinance to hold itself.

Now, again, this is my opinion and I am sure I will get bashed for it but I like a good safety net before plunging in deeper waters and leverage too much.

Matthew Drouin · Answer

@Bryce Shipley I've been in your shoes.  The challenge of the typical real estate investor is that you are always running out of money.  Asset rich, but cash poor to grow your real estate business.

A couple of options for you here:

1.)  You can cash out refinance and hold the cash out proceeds on your books until you find a larger deal you want to purchase.  Yes, you are paying interest on utilized cash but it's good to have dry powder when you're ready to pull the trigger on something.  If you don't do this... I always say "opportunity never comes at a convenient time."  I guarantee you, when you find your perfect larger multifamily or commercial deal, you are going to be scrambling to refinance your three properties, and the opportunity will slip through your fingers.

2.)  Find a deal with a seller who will allow you to put their property under contract contingent upon you selling your property or properties and doing a 1031 Exchange.  Problem with this, is that not all sellers will be comfortable with this type of contingency or a contingency like this will render you uncompetitive.

3.)  Do a cash out refi with a hard money lender, and use the cash out proceeds as a down payment on your larger deal.  This would enable you the flexibility of getting your down payment money quickly but cost you in terms of higher interest rates.  Most hard money lenders will charge between 8-16% interest effectively; much higher than the banks.  Then refinance the hard money mortgage with conventional permanent financing with a bank.  Or if the larger deal you are buying has enough meat on the bone from a value add standpoint, you can force the apprecation by stabilizing expenses, pushing rents after performing improvements, and then refinance your new deal and pay off the hard money loans on your condos.  This scenario would require you to walk the knife a bit and add a lot of moving parts or variables which you might not be comfortable with.

If I were you, I would go with option 1.  With rates as low as they are right now, you are essentially shorting the dollar.  If you needed a place for the cash for a year or so, perhaps you could be a hard money lender yourself and make some money on the spread until you are ready to purchase something larger.

I hope this helps!  Congrats on being a stay at home parent.  Being a good and present family person was my top reason for earning my financial freedom.  I was able to accomplish that by scaling into larger deals.

Ronald Allen Barney · Answer

Well if you won't consider cash out refi or HELOC your other option is to accumulate more cash.

John C. · Answer

@Joe Villeneuve

Telling someone to sell what they just bought and start all over is probably not cost-effective for them.

Right now he has a major safety net and in a great position to start leveraging, if he wants to,  or continue to cover his butt with more owned assets and cash flow before he starts leveraging.

Bryce Shipley · Answer

If I were to leverage the three and get a portfolio loan I would be paying about $1,277.53 a month and would get about $225,000 to work with. It's certainly not unreasonable to take on that payment in order to get the capital I need to keep going. One condo would pay for the borrowed money and I'd still be cash flowing pretty well with the others. It's certainly an option.

Brad Sneckner · Answer

Agreed. I particularly like the suggestion of financing other people in the short term to earn a return on that money while you seek your deal. Put that money to work!

Joe Villeneuve · Answer

Bryce, this way is perfect for your situation.  I've been self-employed all my life, which means I was also a stay at home Dad.  This is the best way to do this.

Bryce Shipley · Answer

Hi Matthew, thanks for all the great info! I think based on what you and a few others have said cash out refi is probably the best route for me. I agree that while it will sting to pay interest in the short term, it's much better to be ready when I find that bigger deal like you said!

4 Properties and no cash, now what?

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