How do you finance your deals?

Question

Hi all,

I'm a relatively new investor looking to expand my portfolio exponentially.  I'm 30 years old and I own 3 SFRs, one of which is my primary residence and two of which are rentals.  I bought my primary residence at 23 and worked like a mad dog to pay it off.  I then refinanced with a HELOC, and have used  this cash to purchase and renovate my 2 current rentals.  I'm currently in contract (yay!) on what would be my 4th SFR.

If I close on this property, I will have exhausted all of my available cash.  At first I thought I was going to invest conservatively--  pay off each property before purchasing another, so that financing never becomes an issue.  The older I get, the more I realize that I need to hurry up.  I want to enjoy my youth while I still have it.

Thus the question presents itself.  What do I do now?

I am fortunate that I have a decent job and I am able to pay down mortgages relatively quickly.  Also, my credit score is in the 800s and I have a very low DTI.

I still work like a dog.  I work in the high-end restaurant industry and I'm not sure how long I can keep up these 60 hour workweeks.  In my early to mid twenties I was working 80 hour weeks.  Irrelevant, but that was my strategy.

So...  should I pay down my HELOC asap, use it to put 20% down on a conventional loan on each new property, then use the HELOC again for any necessary renovations to get my properties rent-ready?  Does conventional financing significantly limit one's ability to buy distressed properties and fixers?

Should I just got for it and look for 100% financing on everything?

Or...  does something along the lines of a portfolio line of credit exist?  I have a lot of equity in the 3 homes I own.  I'm guessing a HELOC won't even touch something that isn't a primary residence.  To complicate matters, my 3 properties are in 3 different states.

Thank in advance everyone.  I want to hear how you've done it!

Joe Villeneuve · Answer

You need to go back and recover your cash.  You need your cash working for you, not the other way around.  If your FICO is that high, you need to refi your cash back out and put into next deal, then repeat until you can't get any more loans.

This is assuming you bought right and the cash flow can handle this.  This means positive cash flow must still be coming in after the refi's.  If not, you bought wrong.

Before you say your CF would go down, and you would be losing money, you would be wrong.  You have already lost the money if you paid all cash.  You monthly cash flow is just playing catchup until you are even.  If you refi and get all your cash back out...and then some, you are ahead from day one...and moving forward with your cash working for you now.

...and you are not the one paying off the new debt, your tenants are.  Also, don't think you can payoff your property sooner by helping your tenants pay off the debt.  Let the tenants payoff the debt.  That's what they are there for.

Andrew Postell · Answer

@Jordan Little wanted to give a couple of pointers here.  Leveraging your money is often what investors practice.  Meaning, using as little down money as possible so that they can buy more properties then finance the remaining amount.  The idea is to not buy everything in sight, just really good deals.  Your rent covers the mortgage, so you should always be cash flowing.  If the rent doesn't cover the mortgage...then maybe it's not a property to buy.  If you do this many times over, the cash flow from the properties becomes pretty big.  Then you can use that cash to pay down the mortgages instead of your own cash.  I hope this description makes sense.

So, if you need to get money back from your houses, you don't have to wait 6 months if you don't want to.  You can recoup your purchase price + closing costs within the first 6 months.  But if you are after the first 6 months then 75% of the After Repair Value is the amount of cash you can receive from a CONVENTIONAL loan.  Conventional loans are loans that are governed by Fannie Mae or Freddie Mac (if you recognize those names).  A PORTFOLIO loan could give you a higher amount, say 80% or so, but a portfolio loan carries a higher rate, or it might be adjustable, or both.

I hope this information is helpful and feel free to ask more questions if you need.  Thanks!

Casey Mericle · Answer

1. Learn to buy with creative financing (option, lease option, sandwich option, owner finance, contract for deed, etc.)

2. Consider private or hard money lenders to finance short-term using the BRRRR method

Andrew Postell · Answer

@Joe Villeneuve I wish more cash investors would do this.  Good points all around.

Joe Villeneuve · Answer

Correct on all points.  Let me add another one.

If you loan the cash from one of your LLC's to the one buying/rehabbing the property, and record the loan as a mortgage, you can do a cash out.  Here's how:

1 - LLC #1 loans $60k for buy/rehab/close to LLC #2 on a property with an $80k ARV.

2 - Buy/rehab/close costs only $50k

3 - Immediately refi for "rate and term" = $60k from traditional lender (75% ARV)

4 - Pay off $50k mortgage to LLC #1, and LLC #2 keeps the extra $10k

Cash out, no seasoning

Joe Villeneuve · Answer

Yes, lenders do lend to NOO.  The number one requirement usually is seasoning...meaning you will need to have owned the property for at least 6 months before you can "cash out" of it.  Since you are all cash in, this means you...for any cash you refi out.

Usual terms are from 70-75% of the homes value, with the interest rate based on a number things...most impactful is your FICO.  SHOP AROUND.  Don't just grab the first offer you get for funding.  Shop your financing here the same way you would if you were shopping for carpet.  Not all lenders offer the same things...including qualifiers and terms.

Jordan L. · Answer

Thanks guys.  @Joe Villeneuve how do I refi?   I know this may sound like a rookie question but I have not had to deal with financing much yet.  I own my two rentals outright.  I have a call and an email into a lender that I'm waiting to hear back from on this.   Do lenders even touch non-purchase money loans  on NOO properties?

How do you finance your deals?

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