WHETHER TO LEVERAGE APPT BUILDING AND TAKE A MIL OUT

[Robert Y.]

The question is whether to leverage an apartment building more.

I already posted the setup several months ago:

I'm a 63 year old doctor and a student of BP and RE investing but little practice. My investments have been acquired and managed by my buddy my accountant, who has 250 doors. I have a 20 unit multifamily near the LA City College in LA (this is rent control but considered pretty desirable and not likely to severely crash in a decline). There's about a 350,000$ rental income a year and the net net is 70-130,000$ depending on capital investments needed. Value is 4.9 M and loan is 2.0 M. This seems like a bad cash on cash return, although admittedly it looks worse because of recent appreciation. I've had the property for 3 years after 3.3 M purchase price and we've managed to turn over half the tenants for higher rents. The rest of the tenants are rocks. But it seems like I could get both better forced appreciation AND better cash flow in another market (10 per cent would be nice). I have a friend who owns 40 doors in Cleveland, but an exchange there would give him 75 or 100 more because they are worth less and he doesn't have the time or expertise to manage it. He has gotten me an introduction to someone who might be interested in co investing, managing and helping me with the exchange and loan acquisition; his family manages 4000 + doors. Does anyone have any guidance here: this is a large part of my net worth and I'm sure it's easy to mess this up. Other markets and other ideas are welcome. Thanks ahead of time for not laughing too much, I'm new here and this site seems too good to be true.

The upshot from the above: risks in doing a 1031 into another market were too high, this was the consensus of my advisors. So I forgot about that idea.

However my next brilliant idea was leveraging this thing more. Chase cooperated and is offering me:

Loan Amount:	$3,100,000
Loan Term:	30 Years
5 Year Fixed Rate (as of today):	4.20%
Amortization:	30 Years
Monthly Payment	$15,160
Margin:	2.25% over 6 Mth. LIBOR
Prepayment Penalty	5/4/3/2/1
Life Cap:	9.50%
Life Floor:	2.50%

The original loan according to the loan agent:

The programs are very similar however your rate is currently lower at 3.83%. This loan was originated in 2014 so we are 3 years into the loan leaving only 2 years left on your fixed rate. Once this rate matures your new rate will be 6 mth. LIBOR plus 2.50%.

My understanding in speaking to Gary was that the main motivation for refinancing the property was to take advantage of the equity in the property and pull cash out. Your current loan amount is only $1.928 million so your cash out will be north of $1.1 million.

The prepayment penalty is a percentage of the current loan balance declining annually. For example if you prepay your loan in year 1 the penalty would be 5% of the $3.1 million balance. In year 2 the penalty would decline to 4% of the current outstanding balance and so and so on.

Here is a summary of your current terms:

Universal Bank Terms
Loan Amount:	$1,928,010
Loan Term:	30 Years
5 Year Fixed Rate (as of today):	3.83%
Amortization:	30 Years
Monthly Payment	$9,539
Margin:	2.50% over 6 Mth. LIBOR
Prepayment Penalty	4/3/2/1
Life Cap:	9.50%
Life Floor:	3.83%

SO this thing will still cash flow at 25 per cent of net operating income. The loan agent says the bank wouldn’t consider if it didn’t.

THE BIG QUESTION: ALTHOUGH I HAVE SOME PLANS TO INVEST THIS $$ MAYBE IT’S BETTER TO NOT STRIP THE EQUITY OUT OF THE PROPERTY. I’m not a super experienced investor. My accountant has a plan to buy 2-3 million apartment buildings for cash with 4 partners in precisely his area where he has the expertise and put the lipstick on them and flip them in a few months each. He says if we hit a crash he can always manage them and so there’s little risk. And I am considering Jeff Brown’s mortgage bonds.

So there may not be a concrete answer. I don’t need this money for lifestyle but I am 63 years old. No one knows if and when this crazy real estate in LA will crash. It does seem diversification out of this market through this loan is a reasonable idea. California is essentially a non-recourse state because it requires a 3 years judicial foreclosure to accomplish recourse.