Best way to use equity on seller financed properties?

[Mark Erhart]

Hello,

In late 2019 I bought out my parents 3 rental properties (5 units) through 5% down payment, seller financing with a 3% interest rate! It was mismanaged at the time and we renovated 3 of the units and raised the rents of all 5 units. The value of the properties have increased dramatically and I want to get the most use of the equity in the properties. I am hesitant to do a cash out refinance because the interest rate of 3% seller financing is hard to beat. The loan amount is about 500k and I believe the properties are worth around 850k.

The properties are in a LLC, what are the best options to use the equity in these properties to continue to grow our portfolio?

Thanks in advance,

Mark

[Henry Clark]

Your still in Seller financing.  No bank will want to take 2nd position on them as collateral.

Option 1:  Recommend, work with your parents since there are 3 properties, to Refinance with them first.  See if you have enough paid down (not likely, since you just bought in 2019), to take one of the properties out of their loan to you.  This property then is unencumbered and you can use it for equity on your next deal.

Option 2:  If they are nice (not a business concept), if one of the houses is worth $350k ($850k less $500k); see if they will release the lien against that house, if they are willing to give you a Zero % collateralized loan on the last two houses for the $500k debt.  Talk with a Tax accountant to make sure the IRS does not view this as a taxable Gift, given this is only two years later.  Or an avoidance of Inheritance tax.  Basically substantiate the price they sold to you was the same as third party appraisal.

Option 3:  Do a traditional loan, lets say at 25% down.  If $850k, then 25% = $213k collateral needed.  You would have $850k less $500k existing loan= $350k less $213k= $137k cash out refi. New interest rate would be %?? and loan term would be ??.

Option 4:  Same as 2 above, but 40%.  $850k at 40%=  $340k collateral needed.  $850k less $500k = $350k.  $340k vs $350k, you don't have enough equity to refi at 40%; and you would get $0 cash out.

Issues:

A.  If you refi to the $850k, will the three properties cash flow now?

B.  Will the next property cash flow support this added debt.  Assuming you get a Market rate deal on the 4th  property, it probably won't help support the added debt on the first three properties.

C.  Do a Risk analysis.  If you take on the 4th property, what conditions would have to occur to make you go under water?  Lets say you end up with 6 "Units" at the 4 properties, how many would have to not pay or be vacant to make you miss your P/I payments?  Just about 15 years ago, you could have bought lots of Florida properties cheap.

Make sure the added Cash can support itself.