Line of Credit on a 5+ Unit Building?

Question

BP,

I have a 7 unit apartment building that I have a bunch of equity in. Is it possible to get a line of credit on this property much like you would get a HELOC on a SFR? Right now, my only understanding to how to get access to this equity is through a cash-out refinance. Other Thoughts / suggestions?

Grateful,

Matt

Nick Schoch · Answer

Below are a some questions I would ask when researching a real estate line of credit:

• Do you offer revolving lines of credit secured by investor real estate? You will want to specify whether your proposed collateral/property is 1-4 unit or 5+ commercial.
• What property types do you lend against?
• What geographic areas do you lend in?
• Can the security interest in the property be a second deed of trust or does it need to be senior? This question addresses whether you can keep an existing loan ahead of the new line of credit.
• Do you lend unsecured with a negative pledge, which is a promise not to put debt on a property?
• Will you lend against a portfolio of properties?
• What is the minimum loan amount?
• What is the maximum loan amount?
• What is the maximum LTV and minimum debt service coverage ratio used to size the loan?
• Does the DSCR sizing test use an interest rate floor or the rate at the time of underwriting?
• What is the maximum loan term?
• How does the renewal compare to the initial origination in terms of cost and time?
• What index do you use for the adjustable/floating rate?
• What spread over the index do you expect? (Spread + Index = the rate you pay)
• What fees do you charge to originate the loan?
• Are there any fees charged based on usage or lack thereof?
• Are there any restrictions on draws or how the funds are used?
• Are there any fees for closing the line early?

Nick Schoch · Answer

An investor property line of credit is definitely harder to find than a mortgage/term loan. They generally do not come with terms as friendly as a Home Equity Line of Credit (HELOC).

When I sold and underwrote these types of facilities at a large regional bank, we generally limited the offering to strong relationship clients. Even then, we would charge unused fees to ensure that we collected enough income so the deal made sense. Lots of investors like having the capital available and never use it. Consequently, they never pay interest. This is great for the investor because they pay only if they need it. No so great for the lender who still has a commitment and isn't collecting interest. The bank still has to reserve capital for the potential usage and it costs them money.

The downside for the investor is that most lenders limit the term on their lines of credit between 12-36 months. This means that to renew the facility, the borrower must go through the underwriting process every 12-36 months. Depending on the size of the loan, this could mean paying for new third party reports like an appraisal. Some lenders streamline this process, but it can still be a hassle. You can mitigate the appraisal/third party costs by providing a negative pledge on the would-be collateral property and getting an unsecured line of credit. This may be only available for high net worth individuals with strong balance sheets.

Ultimately, I would call around to local banks and credit unions to see if they have an offering. The less standardized the loan product, the more variance you will see in offerings. As such, calling around will get you the best deal.

Tyler Blackwell · Answer

I've spoken with my local bank about a business line of credit based on equity of properties in our LLC, and they can do it, so YES, it's possible. It can be a little pricey if you have a lot of properties because each will require a formal appraisal, but in your case for only one building it might be reasonable. Consider it a cost of business, right? Out here in the Puget sound an appraisal runs about $800 these days. When I moved here in 2010 it was only $300.

Justin Kane · Answer

you can always work with a company like fund and grow, that way there is no lien position and it doesnt affect your personal credit, or you can speak directly to your lender, there are so many programs right now i wouldnt be surprised if they had some cool things out there

Oleg Shalumov · Answer

@Matt Crawford you can, reach out to small local bank or credit union on Line of Credit”

Jaysen Medhurst · Answer

@Matt Crawford, talk to your local bank about a line of credit. It won't be a HELOC, but they may have some products that meet your needs.

How much (%) equity do you have in the 7-unit? You may be able to do a 2nd mortgage, if you have a lot of equity and can keep your LTV below 75%.

Allyssa McCleery · Answer

From what I learned yesterday your best bet is to approach a credit union and they will lend up to 80% of the available equity. This was a very informal conversation I had with someone but I am interested in getting access to this type of funding as well.

@Nick Schoch Do you have any sample questions you suggest asking when calling around to these institutions to identify the best options first? Especially for someone with an existing loan that doesn't want to refi out of it? (investment property only)

Ryan Scott Isacksen · Answer

This is what the person I work with at US Bank said when I asked:"Great question on an investment property – yes we do business lines of credit on investment and owner occupied properties. The only caveat to it would be that if there is a first lien position in place, we would need to refinance it as US Bank has to be in first lien position and a 2nd or line can be added behind it, of course if a property is free and clear then the line of credit is in 1st position. The amount of the line depends strictly on the cash flow of the property and maximum lines are $500K."

Line of Credit on a 5+ Unit Building?

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