How to best make use of the money in my paid off rental property

Question

(I posted about this in another Discussion board. Interested to hear what others in this board has to say, too. Thanks!)

Hi BP friends,

I have 1 rental property that I paid all cash for ($150k). Right now, I'm looking to purchase more rental properties (thinking about 4 doors each in the $50k price range)  and would like to know how I can best make use of my equity from my 1 rental property.

I've looked into getting a home equity loan, however, I was turned off by the high interest rate.

I'm reaching out to all of you for suggestions. If you're in my situation, how would you go about doing the financing for my next 4 doors, using the $150K in my first rental property?

Thanks much in advance.

Rachel

Joe Villeneuve · Answer

Put title of this one in an LLC, then sell memberships in the LLC.  Base the splits on getting your equivilant value from the cash you put into the property (now the asset of the LLC).  Cash flow is distributed based on % ownership/membership in the LLC of the members.

No loans, just partners.

Do the same thing with the next property, and so on.

I find it's easier to find investors with smaller chunks of cash, not enough to go on their own, that have no/little knowledge or time, that want cash flow.

This solves both problems, and, since the property will still show 100% equity, you can always refinance down the road.

JD Martin · Answer

This is simply brilliant. I will have to remember that should I ever want to go this route on some of our properties.

Joe Villeneuve · Answer

The partnership is in an LLC.  The Articles can show the disbursements to be different than the management breakdowns.  Example:

Member     %Disp   % MngmtA                    25            55B                    25            15C                    25            15D                    25            15

Joe Villeneuve · Answer

A credit partner is added for the REFI...if you want to take that route.  If you do, this is how I do it:

1 - Credit partner refinances at 75%.  If that covers what the Cash Equity Partners put in, they get their cash investments back 1st...then any extra from the REFI gets distributed to the original partners based on the original %...if the REFI falls short, the Cash Partners get all the cash from the REFI based on their %.  They will all still be short of complete reimbursement, but they will have very little left of the cash to recover.

2 - The new % follow something like this-Member    %Disb      % Mngmt

A                  25                  55B                  15                 10C                  15                 10D                  15                 10 E                  30                 15  Credit Partner

The actual % splits are up to you.  This is just an example

JD Martin · Answer

I'm a little foggy on this part. I follow all of the partners getting their original cash back, but what happens after that stage?

Joe Villeneuve · Answer

@Jd Martin  So you like it, eh JD?  There's an added part to it.  Since there's no debt on the property, you can still refinance down the road and tap into the 100% equity.  Everyone's CF goes down, but everyone also get's their cash they put in back...and it still cash flow.

There's a trick to this though.  The Credit partner's % comes out of the Cash Partner's side...NOT the management side, but any "cash out" that comes from the REFI above the Cash In that was paid in by the Equity Partners (they get their cash back first) is disbursed to the original partners (not the Credit Partner since the Credit Partner isn't a partner until AFTER the REFI goes through), based on the original % Splits before the REFI (Credit Partner addition).

JD Martin · Answer

If you're going to go the partner route, be sure to keep a controlling interest - either 50.1% or have some foolproof partners (i.e. your mother, for example) to give you enough control over disposition of the asset.

Mark Fedorov · Answer

It has happen to me that I went into a bank for a equity loan and the bank guy is pushing an equity line of credit... you should get a term loan at about 4%... if not check out another bank or credit union.

The only other option would be that you start saving what your payments would be, if you get an 80% LTV loan on your house, that is $120K at would be about $570/ month... if your place is kicking that out, put it in savings.

Luke H. · Answer

I'm curious to know what the 'high' interest rate was? Did you shop it around?Is it break the 'rules' if you use home equity loan to buy a house? Haha.ME: I'd look for a private loan with the house as collateral.  Having partners can be a hassle. Try crowd sourcing that property.

How to best make use of the money in my paid off rental property

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