Should I run a LOC or just do a Refinance?

Question

I am currently in a situation where my last refinance put me in a position where I have $10,000 in leftover capital and was able to purchase (3) properties in cash (i.e. that I plan to borrow against for future acquisitions).

My lender seems to think it would be in my best interest to use these (3) properties as collateral to obtain a Line of Credit but to be honest I am a little confused as to why. Hoping someone on here may be able to explain a little better.

Lets assume after appraisals based on the LTV they are willing to give me $100,000 (i.e. arbitrary number to make things simple) either in a Line of Credit or as a bundled refinance.

If my intent is to use this money to purchase say another (2) houses at $50,000 OTD a piece or a grand total of the $100,000 I plan to borrow.

Using the LOC Model I know have my Line of Credit maxed out and (2) houses in the clear. This is what I get confused with and need some guidance:

1. Do I leave the line of credit open and take out an additional Line of Credit or Refinance against the (2) new properties and use that money to purchase additional properties?

2. Do I take refinances out on the new properties to payback the line of credit now leaving me with a new refinance and my existing line of credit back at $100,000 to purchase new properties?

The other option is I refinance these (3) homes for again the theoretical value of $100,000. I then take that $100,000 and buy my (2) new homes. I then take another refinance out against these (2) new homes to reestablish my funds for purchasing properties.

To be honest I am confused how one is better than the other as from the way I see it your essentially doing the same thing.

Jared

Moises R Cosme · Answer

Using the LOC Model I know have my Line of Credit maxed out and (2) houses in the clear [HOW MUCH ARE THE HOUSES WORTH?  LENDER WILL TYPICALLY ONLY GIVE UP TO 75% OF THE VALUE OF THE PROPERTIES]. This is what I get confused with and need some guidance:

1. Do I leave the line of credit open and take out an additional Line of Credit or Refinance against the (2) new properties and use that money to purchase additional properties?

2. Do I take refinances out on the new properties to payback the line of credit now leaving me with a new refinance and my existing line of credit back at $100,000 to purchase new properties?

The other option is I refinance these (3) homes for again the theoretical value of $100,000. I then take that $100,000 and buy my (2) new homes. I then take another refinance out against these (2) new homes to reestablish my funds for purchasing properties.

GIVEN THIS SET OF CIRCUMSTANCES, I WOULD CASH OUT REFINANCE THE TWO NEW PROPERTIES & MAX THEM OUT AT 75% LTV; RENT THEM OUT SO THAT THE INCOME IS SERVICING THE DEBT ASSOCIATED WITH EACH.  I WOULD TAKE THE CASH AND PAY DOWN THE ORIGINAL LINE OF CREDIT AND USE THE LINE OF CREDIT TO PURCHASE MORE PROPERTY USING HARD MONEY TO LEVERAGE MY PURCHASING POWER.

Moises R Cosme · Answer

Jared,

I am sorry, I'll take a crack it but I would not cross collateralize property to get a line of credit.  Message me & I can introduce you to my mortgage guy - I have a $2M line of credit, which I use for my projects.

BEFORE RUNNING THE SCENARIO: If you cross collateralize then all of the properties are at risk - worse case scenario example, you cross collateralize the properties get the line of credit and purchase a big single family property for renovation.  During the renovation you have walls open & discover asbestos, and the asbestos cracks and one of the guys on the job sues you - all of your property is now at risk.  This is an extreme scenario but it is the scenario my attorney used when talking to me about separate LLC for flips, rentals and my brokerage business - in sum, if you have everything tied together everything goes down with the ship if you hit an iceberg.

I'll reply to the specific scenario on my next post here -

Jared McCullough · Answer

Moises,

I greatly appreciate the reply. Any chance you could take the example above and help me understand using my exact scenario?

Jared

Moises R Cosme · Answer

Jared,

The line of credit option is better; it allows you to pay it down when you close a deal & then run it up again when you do a new deal.  Refinancing has two big downsides (a) fees you pay each time you refi, and (b) it is subject to approval each time.

I hope this helps!!!