How to go about this deal!!!

[Antonio Folkes]

Hello, I looking for advice or any information to steering me in the right direction. I am currently located in Detroit and I'm looking to make most of my investments in the Detroit area. I currently own 4 properties, 3 which are free and clear (rented), 1 with a mortgage. I bought all the properties at the right times and prices which in retire they've all greatly appreciated. I am now actively look for a apartment building 10+ units. I've came across a 27 unit for a great price but it will definitely need to be rehabbed. I'm ok with that because due to the price I'll be buying at I will be still making out on top. (Looking to buy and hold the apartment building) My question is how do I go about financing for this apartment building? I have a limited amount of cash, not enough for a down payment for a commercial investment property. I have been looking into a HELOC for one of my investments properties that I can probably pull out 80k-85k which would cover more than enough for the down payment and could cover some of the rehab. Is this the right way to go? Fico: 748

[Greg Scott]

Antonio:

Feel free to contact me and I can help you get started moving into apartments.

For me the simple answer to your question is to do a cash-out refi on your existing properties.   Personally, I never want to pay off my properties because that hurts your total returns.*   Use the cash-out as your down payment.

* People have been trained to pay off mortgages, but it is really a terrible idea in rental real estate.   Try this simplified model:

Pay cash for a $100K property that rents for $1000 per month.   Let say it has $4000/yr in insurance, taxes and repairs every year.  You just made $8000 on $100K investment or 8%.   Depreciation on this property is about $3K per year so you pay income taxes on $5K

Now, lets say you borrow 50% of the property value at 5% interest, but instead of buying one of these properties, you buy two.

Now you have $200K in real estate that rents for $2000 per month.   You have $8K/yr in insurance taxes and repairs plus $5K in interest payments.   That means you made $11K on your $100K in cash or 11%.  Even better, you now get $6K in depreciation so more than 1/2 of your income is sheltered from the government.

Do the math again at higher levels of leverage and the numbers get better and better.