Best Way To Pull Out The Equity From Our Portfolio Is...?

Question

I'm looking for advice/ideas on the best way to access the Equity we have built up in our portfolio.

We have 5 small multi-family properties, all financed with traditional 30-year fixed rate loans locked in sub 4.75%. To continue to grow our business, we need to pull out the equity that has built up.

Our preference is to keep the existing loans and the great terms we've established--if at all possible. Does anyone have any ideas on how we can best do this, without converting these all into a single portfolio loan.

Thanks for the help BP!

Upen Patel · Answer

@Andrew Campbell you have passed the threshold of 4 properties to be able to do a cash-out. Fannie Mae will not allow cash-out once an investor has 5+ conventional loans. Only Rate-Term refi is allowed. You can refi to a non-conventional lender to do a cash out, and then refi to a conventional in 6 months (at the higher loan amount as Rate-Term).Or as @Jonathan Towell mentioned, find a local banker who might give you a cross collateralize credit line.Good luck.Upen PatelFederal NMLS# 1374243

Justin R. · Answer

Maybe I wasn't too clear writing that. What I meant was... If the mortgagee is an entity I control, could I theoretically get a mortgage on my property for zero cost, at whatever amount I want, pay myself interest, and then refi it after 6 months to a Fannie Mae criteria loan?I suppose the mortgagee could be any private individual, family member, etc.The net effect would be a cash out conventional refi on investment properties #5-10.... And it'd take years and wouldn't be that practical. :)

Upen Patel · Answer

The new lender (and the public) would know of the transactions. Its public record. After a 6 month seasoning period it would not matter. The only issue I see in your hypothetical is the "company". Residential conventional loans are made to individuals NOT companies.Upen Patel, Mortgage BankerFederal NMLS# 1374243

Neal Collins · Answer

Just spit balling another idea but how much equity do you have in your other properties? Raise private funds and secure them with trust deeds in second position on your existing properties to fund additional acquisitions. Refi with a bank after seasoning period to put long term financing on the new properties. Keep that private money working for you and earning a healthy rate of return for your investors and you're now in a great spot if you can keep the mill churning.

Justin R. · Answer

@Andrew Campbell I don't have a good plan at the moment, unfortunately. Currently, I'm taking on partners and doing a preferred equity arrangement on the project I'm doing now. But, that combination isn't going to work much longer either.

Justin R. · Answer

@Upen Patel Totally hypothetical, but imagine I have 5 properties with 30y financing, each worth $200k. Now imagine I've also got $200k sitting around. If I had a company and mortgaged one property to that company, waited 6 months, and refi' with a new conventional loan, what are the chances the new lender would (A) know and (B) care?Just thinking about how the machine works here...

Andrew Campbell · Answer

@Justin R. I feel your pain. It seems like everyone I've talked to faces this problem, and just has to decide how they want to proceed. In Texas right now, I'm focused on getting more doors, and just trying to figure out how access the equity I've got to fund more acquisitions. I hate the idea of giving up these great 30-year fixed loans, but in order to access the cash am considering doing it. How do you keep finding cash to get your conventional loans? And what's your plan once you reach the 10-loan cap?

Kerry Baird · Answer

I'm here, too. Grateful for this thread and responses.

Upen Patel · Answer

@Andrew Campbell No, you can't roll all the loans into one (that's commercial). You can refi each property individually to take the cash out, let it season for 6 months and then refi again (rate-term this time) to lock into a 30 yrs fixed conforming loan. As @Justin R. mentioned, this does cost money and the 1st refi (to do the cash-out) will likely be high. But unfortunately this is the only option you have to do a cash-out on the residential side.Upen PatelFederal NMLS# 1374243

Justin R. · Answer

Andrew Campbell I'm in a somewhat similar situation, and I've visited a total of 9 local banks looking for favorable options on both the purchase and the access-the-equity parts of financing. Many people throw around portfolio loans, cross-collateralizing, seconds, HELOCs, and other stuff -- unless you're not sensitive to interest rates, I don't see how any of it will work in today's reality (in my market, at least). Every option requires a refi to that bank, and to get a decent rate I'll end up with a 5y loan and a 2y rate reset that exposes me to interest rate risk. To get longer terms, the rates quickly go 150bps higher. In my reality, as many others have alluded to, once I'm past 4 investment properties, especially if I'm doing properties that i want to rehab and refi to get at some of my sweat equity, it's private money first, then commercial second. Buying near final appraised value and I'd still go Fannie Mae. I keep reading threads like this in hopes there's something I'm not thinking about, but I'm pretty convinced there isn't and plan to love the conventional rates and terms I've got, and accept I won't get them or the equity out of the properties going forward.