Loan Restructure to Purchase

[Rich Bertran]

FIRST-TIME INVESTOR

REI Pros,

I am looking to refinance my home and pull money out to pay off a property I own in Oklahoma to pull a loan against it and purchase a self-storage complex. Ultimately I want to hold the rental property long-term.

Target Asset Purchase Price: $1.5M-$2M

My Home:

• Loan Ballance _ $208K
• CMA _ $415K-$430K (appraisal due in next week to verify)
• Refi. Rate _ 2.5% (locked in)
• Refi Cost _ $20K
• Equity Pulled _ $124K
• New loan Amount _ $352K

Oklahoma Renal: 

• Loan Ballance _ $124K
• Debt Service _ $840
• Property MNGT _ $125
• Escrow _ $285
• Rent _ $1250
• Cash Flow (after restructure) _ $540, (I am subtracting $300 for the new home loan increase, escrow, & property management fees at 10%) 

If it were all up to me, I would sell both properties and purchase without a second thought. However, my wife is more cautious than me, and I understand her concerns. 

Her Concerns:

• Current home location, cannot re-create for the price point we got into this house, $250K
• Too much debt to get started (target purchase price above), she suggested partners, and I agreed
• Does not want to sell the rental property and put all the money into a new investment

Bottom Line-I needs advice as to the best way to posture our family to move into a multi-unit property that will give better security in our current markets environment. 

Thank you in advance for any and all help/insight.

Respectfully,

Rich

[Nathan Gesner]

First off, you're calculating cash flow incorrectly. Cash flow is not the amount left over after paying your mortgage. You should also be setting aside a portion for taxes, insurance, maintenance, capex, vacancy, property management, etc. As a general rule of thumb, you'll spend 40 - 50% of the rent income on those additional expenses, then you pay the mortgage (principal and interest), and what is left over is your cash flow.

Second, if you pull equity out of these properties, your mortgage payments will be higher and you'll have even less cash flow.

Third, you can only borrow up to 80% of the equity. Why spend money to pay down a loan and then borrow 80% of that money back?

Fourth, to purchase a commercial property at $2 million you need about $500,000 and that doesn't include a reserve for the inevitable problems that will pop up in the first year.

I don't know you, your personal situation, your experience with real estate investing, or the property you're looking to purchase. Based on what you've shared, I wonder if you're really ready. Have you even spoken with a lender? Do you know how to evaluate a storage facility to determine market value, return on investment, cash flow, management needs, projected maintenance, etc?