Question about leveraging existing rental properties

[Garrett Brown]

Hey guys-

Brand new to the site and really enjoying it so far! My business partner and I have been investing in real estate for about 2 years now and we're looking to take it to the next level but need some advice. Here's our situation:

We have purchased 2 single-family properties in the Dallas area that are currently rented out and producing income. We paid cash for both of them (they are valued between $55k and $65k) so we own them outright. Now that we have the experience and understanding of what it takes to acquire these types of properties, we'd like to use financing to purchase some new ones. However, as we've looked to lenders we have run into a couple of problems:

1. The size of these deals is too small. Most lenders don't want to loan us less than $50k (after down payment). This is not a huge problem as we'd be happy to purchase more expensive properties as long we can make the numbers work. In fact, we would prefer multifamily units. It will require learning about a new segment of the market, but that is fine and something we would welcome.

2. We own our other properties under LLCs. Lenders have expressed a willingness to loan us money as individuals for a mortgage loan, but not to our companies. Even though the companies have been generating income for 1-2 years we can't seem to get around this.

My questions for the group are, do any of you have experience with a similar situation? Is there any way for us to pull money out of our existing properties, preferably through a mortgage loan, or alternatively through a business loan secured by the business assets (i.e. the properties)? If not, what other approaches should we explore? Other kinds of business loans? Having one of us borrow and buy as an individual and then transfer the property into the LLC?

It seems strange that we have well over $100k in income-producing assets yet can't easily take money out of them.

I look forward to your feedback!

[David Beard]

The problem you'll encounter with local lenders is that you apparently don't reside in the area of the property. This is a HUGE negative, and often a show stopper. Statistically, out-of-area investors have fared poorly, due to not being able to monitor this property (as well as often overpaying), thus this policy by local banks these days (major change from the heady 2004-2006 period).

Oddly enough, you'll do better here with a conventional (Fannie/Freddie) loan. They won't penalize you for not being local, as they follow a formulaic process that doesn't make reference to where you live. Since you have two years experience (documented on 2010 and 2011 tax returns), you should be able to count the net rental income (NOI minus P&I) when qualifying, for debt ratio purposes. You can take out the conventional loan as co-borrowers, and take title as co-owners. After the fact, you can use a technique to move beneficial title to the LLC (MUCH info on this site on techniques, want to talk to your RE attorney).

You should be able to get about 70-75% LTV on a cash-out refi. Citimortgage does smaller loan sizes, as do many of the large lenders. Sometimes they have extra fees for loan amounts, but thgese are well worth it to lock in the long-term low-rate financing.

I'd recommend that you google the Fannie Mae selling guide and read these sections, to get familiar with how it works for income properties, and the implications when you have more than four finaced properties.

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