How to maximize leverage on 4 SFH rentals to get to that "next step"

[David Gleason]

HI BP community! I currently have 4 SFH rentals in the southeast, 3 of which are owned free-and-clear save for property taxes and insurance. The 4th has a LTV of 40%. Combined rents on the property net roughly $4200/mo after expenses (PM, taxes, ins., etc.) According to market comps from the area all together the homes' value total approximately $600k minus 80k left on that 4th property's mortgage. My main goal is to get to that "next step" and use these assets to leverage 5+ multifamily, apartments, or cash out refi's to spread out into additional SFHs. The problem is that I live in California (which is cost prohibitive for me currently to "buy local") and must rely on remote management that is local to the investment area. I'm saavy enough to know that I don't know enough yet as to what would be the best use of these assets to grow my portfolio and really begin to snowball the passive income, leverage and appreciation. Given the parameters of needing to be remote and trying to maximize monthly passive income while acquiring more/larger properties either through more SFH or 5+ multifams, if you were in my position, what would y'all do? I'm open to "outside-the-box" ideas as well (getting into-self-storage, etc.) Thank you in advance for any and all advice!

[AJ Wong]

Hi David. Congratulations on a healthy portfolio. There are several options to utilize the equity position. You can access cash out equity lines, fixed seconds or conventional loans with reasonable terms to contribute to the downpayment. Investment properties will usually allow 65-75% of the value. Generally any multi family purchases 5+ units is considered commercial, and although many lenders offer financing, the down payment requirements will be slightly higher..usually 25-35% depending on the number of doors. 

California will be more competitive but you have the equity available for the right property and can utilize the proposed or existing rents to qualify on the new property. Depending on how your income is structured a DSCR (debt service coverage ratio) or bank statement qualification could be useful. You could also search for Two - 3 or 4 plex properties on separate tax lots and do each transaction as residential. Rates and terms are generally more favorable.

If Oregon is of interest there is a significantly lower entry price per door with somewhat comparable CA returns, certainly a luxury STR would perform and be manageable with a local team. Either way, a BIG component will be financing for 5+ units, so either way check in with @Joseph Chiofalo with a scenario overview. He can help you structure most effectively based on some prospective properties or transaction types. You might only need to leverage a portion of the portfolio. 

Great job and best of luck! 

[Joseph Chiofalo]

Hi David, 

What price were you looking to go up to on the 5+ unit purchase? 

There are a handful of ways you can structure the financing on the single family homes that you currently own to access the equity. 

Your credit and the income that the property produces will be a big component in how high of a loan to value you can finance. 

[David Gleason]

Hi AJ and Joseph, thanks for the insights.  I'm primarily looking to keep my investments in Tennessee as the price point is considerably less than California.  It's also a LOT more landlord-friendly and rents are better bang for the buck.  Credit is stellar (800+) and I was considering cash out equities on the free and clear properties plus capital reserves to use as 25-35% downs on property(ies) up to 800k total (if not partnering).

Obviously I don't want to over-leverage but I'm still trying to find the right vehicle: 2-3 more SFH?, one low door comm. multifam (as in max 12-15 unit)?, partnering for larger multifam?, etc. to get to that sweet spot in the leverage math that makes sense. I HAVE considered STRs as well as Med-Term rentals (travelling pros) and am not opposed to them, but it's an area of real estate I know far less about. Obviously if the difference between a standard LTR and a STR/MidTerm is that different, I would highly consider it, but I'd have to study up on all the extra variables of what an STR entails.

[Mike Morgan]

Hi David, it looks like your way on your way, Congrats!!! If you would like to explore the Chattanooga market to help, get you to that next level. Please, feel free to reach out. There are a lot of good opportunities in this market.

[Jonathan Greene]

You have a good foundation right now, so I wouldn't try to leverage too much of it to go bigger. That can be a big win, but also a big loss. Are all of your current properties performing at their best without any potential cap ex coming? I would make sure that before you leverage out your portfolio that those are all at their best. The last think you want to do is to put leverage on one of them and then need a new roof or furnace.

[David Gleason]

HI @Mike Morgan, I may take you up on that; what's the avg. for 3/2 SFH's in B-class neighborhoods there? @Jonathan Greene, that's an extremely good point.  So far all 4 properties have relatively new roofs (<7 yrs. old), furnace's are all 3 years or less.  I'm considering a value add if the construction costs work out to add a 2nd bath (either full or half) to one property than is a 3/1.  (The other 3 are 3/2s).  Lease for that one is up in July and would use that window to do that if the juice is worth the squeeze.

[Mike Morgan]

Quote from @David Gleason:

HI @Mike Morgan, I may take you up on that; what's the avg. for 3/2 SFH's in B-class neighborhoods there? @Jonathan Greene, that's an extremely good point.  So far all 4 properties have relatively new roofs (<7 yrs. old), furnace's are all 3 years or less.  I'm considering a value add if the construction costs work out to add a 2nd bath (either full or half) to one property than is a 3/1.  (The other 3 are 3/2s).  Lease for that one is up in July and would use that window to do that if the juice is worth the squeeze.

 Hi David, I'd love to help out anyway possible. You can find some great deals in a B class area here in Chattanooga. 3/2's in B class neighborhoods range from about 200k-235k. With some rent rates as high as $2200-$2400 monthly. Of course those are in the B+ areas. Your numbers probably would not work with anything over 235k. 235k would be turnkey. However, you can find properties with value add as well. Feel free to email me I'd be happy to send you a few examples of what Chattanooga has to offer.