First Property, have LLC, what is the best financing strategy?

Question

I am close to closing on my first property. I have talked to several (probably 15 or more) lenders. I have several options, including cash, to purchase my first property. My CPA is advising me to close everything possible in my LLC.

Here is what I am running into...what is the best financing strategy to allow me to purchase more deals. Let me explain. I currently have a SFR property that I put an offer on for $50K. So lets assume I get it. To get it rent ready, I estimate about 5K of minor repairs.  My realtor believes the house to be worth $80-$85K after repair and rent. So my plan would be to use HML or cash to do the purchase and  minor rehab. I can get 90%LTC. Now the problem with the HML loan is that its expensive, 12%! So I want to refinance out ASAP.  I have some options:

• Conventional Bank, can refinance out in 6 months seasoning at 75%LTV, but need to do it my personal name
• Small Local Bank, will lend me 75% of LTC (cost not value) into my LLC, but only on a 15 year note. Cash flowing a SFR on a 15 year note is tough. They will allow cash out refinace at LTV after 2 year seasoning
• Hard Money Lender will refinance at 80 LTC before 12 months or 75% cash out LTV after 12 months. 
• Talked to several private investors, but won't touch loans under $75K

I think my best bet would be the HML. Take the 90%LTC at 12%. Make the interest only payments for 12 months, then refinance at 75% LTV.  I would $5500 down. It would then cost me $5900 in interest, I could then refinance into a 30 year fixed at $60,000 cashing out $11000. That would get my down payment and interest back minus about $500. I have enough cash to do this for 4-5 properties (I have about $60K to use).

Is this a good strategy?

Alexander Flores · Answer

@Christopher Blanco With it being your first property I would pay all cash. Then after six months of seasoning I would do a cash out refinance and get all of your money out to do another property. My lender said they would allow 75% LTV on the refinance but when it came back they would only allow 70%. This was three weeks ago. My credit is above 700 and it was on my first rental property as well.

During the six month seasoning process get a feel for being a landlord. Today you want to do more deals immediately but maybe a week into the process you may change your mind. With it being your first deal you will learn a lot fast, both about yourself and REI.

If after the cash out refinance you want to do more deals then dive in head first and get as many properties as you can afford/desire!

Joe Splitrock · Answer

I am a big fan of leverage, but paying cash short term to get a property and then lock it into long term financing is a good strategy. People buy properties at auction with cash all the time, then do minor rehab and either sell or finance. Locking up your money for 6 months isn't very long. (I am not even sure you need to wait that long to finance if you pay cash). I guess you have to ask yourself what that cash will otherwise be doing in the next 6 months. If it is earning over 12%, then maybe the hard money loan does make sense.

No problem following advice from your CPA. I was only trying to say that if you want a 30 year conventional fixed rate mortgage, then buying with your LLC is not an option. There are lots of opinions on LLC. Personally, I prefer to take advantage of long-term low interest financing and carry good liability insurance. My lawyer and CPA both approve of the strategy at this point.

I am just giving my opinion based on what I have done. Do what is best for you. Good luck.

Tom S. · Answer

@Christopher Blanco  A few things I see missing in the calc: you said $5500 down and $5900 interest, and you'd be able to cash out $11k, essentially getting your money back.  But you also mentioned $5k to fix up.  Where is that factored in?  Also there will be closing costs on the purchase, and some on the refi.  A few thousand there.

Finally be sure on the $5k fix up costs and that it will appraise higher.  You'll have to justify to the appraiser that spending $5k on a $50k house makes it worth $85k.  They might push back on that, in my experience.

- Tom

Christopher Blanco · Answer

I ran a bunch of numbers and I think going the HML with a refinance with them after 12 months is the way to go. I ran through a bunch of simulations with these assumptions to help keep it clean:

• purchase+rehab budget = $55K
• ARV= $82K
• rent= $1125
• Purchase houses until available funds reaches 10K first year, then same amount each year after, if cash available allows it.

Scenario 1:

• HML for rehab at 12% interest + points only payments for 12mos at 90%LTC (I kept it the same, but in actuality the program they use steps the interest rate and points down after 2, and 5 flips with them) 
• HML cash out refinance to 30 year fixed at 7% (probably can get lower but wanted conservative estimate) 75% LTV
• Results after 3 years: Total Homes Purchased: 21. Total Monthly OP income: $10,721, Total Cash Generated $90K +, Total Equity Generated (not including pay down) $430,000

Scenario 2:

• Small Local bank, 75% LTC with a 15 year note at 5.5% 
• no cash out refinance as there is a 2% + 5% step down refinance charge
• Results after 3 years: Total Homes Purchased: 3. Total Monthly OP income: $1530, Total Cash Generated $20K +, Total Equity Generated (not including pay down) $82,000

Scenario 3:

• Cash
• Refi with HML (same as above) after 12mos (required seasoning period)
• Results after 3 years: Total Homes Purchased: 3. Total Monthly OP income: $1530, Total Cash Generated $38K +, Total Equity Generated (not including pay down) $82,000

So using the leverage, even though expensive at first caused a HUGE amount of growth. I was able to buy 21 homes (and could have bought more if I didn't limit it to 7 a year). I have 10,000 a month in op income, 2000 a month in cash flow.

Thoughts on these scenarios and data?

Christopher Blanco · Answer

@Joe Splitrock That is an option. The problem is two fold:

• It ties up ALL of my cash for the seasoning period, which is a minimum of 6 months
• My CPA is advising me to keep my business and personal data as separate as possible.

If you ask 10 investors on here, which is better paying cash, or leveraging, they say leverage.

Joe Splitrock · Answer

@Christopher Blanco you mention having the cash to do the whole deal, so why pay 12% for a HML? Save yourself the 12% and buy the property with cash. Make the improvements, get it appraised and take out a conventional 30 year mortgage. Based on the numbers you gave, you should be able to take all your initial investment out, then pay it back over 30 years at a low interest rate. If it is your first rental, I would expect you could do 80% LTV on a conventional. A 30 year conventional fixed rate mortgage will require the loan in your name rather than LLC, but it is worth the long term and low rate. Then just take your cash to the next deal.

Christopher Blanco · Answer

@Tom S.

Thanks. The $5000 is rolled into the loan. The HML will give me 90% LTC on rehab and purchase. As far as the appraiser, I am buying houses below market value, so I agree counting on the appraisal is risky, but my agent and I are being VERY conservative in the ARV's.

Christopher Blanco · Answer

I am working on a spreadsheet now to evaluate that. I also need to take in account how many homes I can buy with each strategy. I'm finding some interesting numbers:

• If I go the HML I can buy twice as many homes, but I won't make ANY money on them until after year 2 and I have a 30 year note on each house.
• If I go the small local bank, and only finance Purchase and Rehab, I can only afford to buy 3 houses before my startup capital is expended, but I make money in year 1 and I only have a 15 year note on each.

I will keep evaluating....

Clayton Plank · Answer

@Christopher Blanco what are the rents for these houses you are looking at and with the cash flow they make how long would it take you to get back your $5900 in interest that you are going to pay for each.

Christopher Phillips · Answer

@Christopher Blanco

Which one gives you the best cash on cash ROI?

First Property, have LLC, what is the best financing strategy?

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