Beyond 10 loan ideas

[Phil Mcnally]

Hi All

I would like to generate financing ideas for properties beyond ten conforming loans. Lets imagine a scenario...

10 x SFH average value $100k

20% - 25% down

Total property portfolio value = $1 million

Total Loan balance = $770k

All on conforming Fannie Mae Loans including the 5 - 10 program

But...

Next I see ten $500k properties I would like to buy but all my loans are used up. What to do? 

Presume cash and qualification for bigger loans is no problem.

1. Find a bank that will take cash down payments and offer commercial loans beyond the conforming ten in existence. The loans would likely be 1% or so higher rates and 10 - 15 year duration with balloon payments etc. Down payments of 25%?  

Buy ten new properties worth $5 mill with $1.25 mill down.

Keep ten existing properties worth $1 mill with $230k down.

Result:

20 properties worth $6 mill and approx $1.5 mill down (worse than 2b (see below), as commercial loans are on 83% of the value)

2. Pay off an existing conforming loan ($75k + $25 original down) to free up a loan slot. Buy the $500k property with a 30 year fixed and 25% down ($125k).

Total 'cost' $225k down for two properties ($100k original and $500k new) worth $600 total.

Repeat this ten times and end up with 20 properties 

Result:

20 properties worth $6 mill and approx $2.25 mill down (more money tied up and commercial loans are on 83% of the value)

2b. Then take the ten paid off properties ($1mill value) and cash out refi with a blanket loan? Portfolio loan? Heloc? at 75% LTV ($750k) For a final result similar to idea number 1.

Total 20 properties worth $6 mill and approx $1.5 mill down (better as cheaper 30y loans are on 83% of the value)

3. Sell the existing ten properties and 1031 exchange into the ten $500k properties using conforming 30y loans. Lose 6% - 8% in transaction costs ($60k - $80k)

Result:

10 properties worth $5 mill and $1.33 mill in down payments and transaction costs (cheaper 30y loans are on 100% of the lower value)

4. Other? 

Let me know your ideas.

phil

[Chris Mason]

Pragmatically, what typically happens is you see the forward-thinking investor unloading the less productive assets as they get close. So they might zip up to eight properties relatively fast, and then through a combination of selling the bad ones, 1031 exchanges, etc, there might be easily 5 acquisitions until at the Fannie cap because someone is swapping out condos for duplexes, duplexes for fourplexes, etc.

Or one has appreciated a zillion percent, and they do a cash out refinance that pays off another one entirely -- same total debt, same total P&I payment, same total portfolio cashflow, but one fewer financed property, freeing up a slot. If some $50k owed midwest SFR is stopping you from buying a great 3/4 of a million dollar asset, it's a no-brainer to cut a $50k check to pay it off, some way or another.

And then you have the "....and now we put 10 in the spouse's name" trick, too (you haven't been putting all of these in both names for no reason up to this point, have you?). Pair that with the same slowness to get from 6-7 to 10, like above, and it's a while before a power couple actually reaches 20.

The portfolio stuff that's very Fannie-like except for not having the 10 financed property cap, and it might be an ARM, will get you to 15 for each spouse, 30 total. You're like "omg an ARM," but I'd point out "grats, now you're in the big leagues, where most debt instruments are adjustable rate in some way or another, and you're invested in the national economy in a new way now that you weren't before."

Beyond that, it's mostly academic. Somewhere along the line someone's going to have accomplished their goals and retire, decide they're sick of one-off deals and start doing apartment complexes or entire portfolios of retiring REI, get divorced, be sick of making payments and stop expanding while they pay the mortgages off (another great way to bump cashflow without taking on additional tenants that you have to babysit), get fed up with residential loans and start using commercial, get into syndication, decide to diversify and put more in Wall Street, buy furnished rental units in Baja, California, start doing hotels and reality TV and the like and eventually become elected President of the United States, etc etc.