Let's Ask the Hard Questions: Equity Rich and Cash Poor

[Keegan Wetzel]

Hi BP!

This is my first post ever...so it gets a bit vulnerable at the end.

I'll keep this as short as possible, but I hope this is helpful to many.  Through communities like this, I think everyone eventually finds themselves in the same scenario (esp. if you have a lot of low fixed-rate debt from the last few years) of being equity rich and cash poor.

I certainly am, and I feel so stuck.  I quit my full time W2 job this past year, and we went full-time on the real estate and mortgage business we created 4 years ago.  Because of this, Conventional Full Doc loans are probably off of the table for a little while.

I've taken HELOCs against every property that I can and I have business lines of credit available as well - total credit available is probably $500k. And I am building and developing ADU's as fast as possible in San Diego. We own 16 units in San Diego and are building 4 ADU's in 2024 and 4 more ADU's in 2025.

Problem(s):

1) I want to buy a primary home and start a family soon, but all of our cash is locked up in equity in real estate (ok, not all of it, but like 65%). So if I take my cash on hand to buy a primary home, then it slows my construction scalability. I think primary homes are going to run up in price massively over the next 2-3 years, and I want to have a place to really call home and be a part of that market share for the next couple of years.

2) Construction lenders want to refinance my entire project to build...but I have 3-4.5% debt on the projects and I just need to get cash to complete my builds, so that I can refi or sell and 1031 on the backend...and I will greatly deplete my cash (and have my lines of credit already obligated on other projects) if I buy a primary house.

Solution(s):

1) Primary home mortgage rates for asset depletion and P&L loans (which I have qualified so far) are like 9%.  On a $2.25M purchase that is a $17,000 a month mortgage...ouch!  Are there better first-lien loan products available? We could make it happen at 7%-7.5%

2) Construction lending - I have scraped builds together so far with multiple HELOCs and lines of credit, but to continue to scale I think I need better products or relationships with lenders.  Do construction products exist that ONLY finance the build portion of a project? Or do better lines of credit exist that could cross-collateralize my equity that is locked up in other properties?

Thank you in advance if you made it this far!  Would love some feedback and direction/guidance!

[Cody L.]

Your best bet might be just to get a higher rate private loan (as you mentioned, 9%) and eat the higher payment until rates move down.  Then refi. 

I've been in that spot.  Hopefully you've done the math and concluded that your higher borrowing cost is offset by what you're able to do with that capital.

I've started to do more and more private loans (to people like you) as they're safe and pay returns that are high on a risk adjusted basis.

Good luck!