Help me understand mortgages for investment properties

[Calvin Thomas]

Here we go.  Initially, I was a web guy and I founded a few large web sites, which I sold a few years ago.  I still have a few, but the large ones I sold off.  I picked up a house, a car and the rest were in Vanguard funds.  After the crash, errr correction, I started to buy up Real Estate in NY/NJ/CT college towns.  I only have a few properties, but I keep on adding one or two every year to my portfolio.  I've always purchased for cash, no mortgage.  Some, I borrowed on margin against my portfolio, and just paid it off.  At a 1% rate on margin, it beats a mortgage any day of the week.  

Others are telling me now that I should look into commercial mortgages instead of funding them myself.  I am hesitant for a few reasons.  One, I hate debt.  When I was running one of my bigger web sites, I had seven figures of debt over my head as the sole owner each month (salaries, rent, expenses, etc.).  It was a lot of pressure for me (never took VC).  I sold in early 2008.  At that point, I had a few bucks and vowed never to go back into debt.  I run a tight ship with all my businesses.  There is a daily P&L ledger for everything.  

I also structure my real estate as each property is in its own LLC, which in turn, is owned by my main corp. Each LLC has its own insurance, and my main corp has an additional 4m umbrella in case of any liabilities from my disregarded entities (LLC properties).

I am not sure how the mortgage game works, as I've never had to deal with it before. I come in as a cash buyer always. If I am sure, I write a check from my margin account to my bank account, create a note to the new LLC, and get a bank check for the amount. I know I will not be able to continue to do debt free as I grow. However, I am just hesitant about mortgages. I do not like having to give tax returns, pay stubs, notices and reasoning as to why I only have a salary at this amount. Why don't I have a staff. How can you manage all of these properties yourself (I have a PM company sub-manage everything). Maybe I am missing something. Maybe I just do not understand the rationale. I am hoping someone can guide me here. It is not that I am afraid of going into debt. I know I can always borrow from my margin, or get a line of credit against any of my properties. I just do not like not owning everything 100% and having to listen to a bank demand this or that.

What am I missing?  Or, essentially, what am I doing wrong or not understanding which is holding me back from expanding further and faster on new opportunities due to my reluctance in taking on any debt?

Thank you.

[Chad Olsen]

@Calvin Thomas, you have a really nice reserve fund so that is really good. I've been working on building my reserve fund up this past year and am nearly complete on that task so kudos to you.

The not wanting a mortgage on your credit is likely actually hurting your credit more than it is helping. There are things that really need to be in your credit profile in order to be desired by the banks to give out more credit. And a huge part of that is how well do you already treat other people's money, ie loans, mortgages and credit cards.

Your comment about not wanting to be rich is confusing. If you don't want to be rich, or even wealthy (have free time to do what you want b/c your passive income exceeds your expenses) then why would you be buying rentals or doing anything in the market at all? I'm not afraid to say that I want to be wealthy. I want to be wealthy, so wealthy that I can buy back all my time and spend it as i see fit, not doing what I "have" to do.

There are non-recourse loans out there (no personal guarantee), but you have to have a track record or some other factor that can offset not having a history of treating banks money well. Going after the non-recourse loans is good, I'm working in that direction too. But that doesn't happen overnight and you have to show a good history.

I would recommend two things:

1) Get a copy of the Value of Debt and read it and think about it

2) Reach out to CreditSense.com. The education alone is worth the time to understand what you don't know about your credit profile. I've had the education and am convinced that a strong credit profile is key to getting credit.