What is my best financing option on this 5 unit property?

Question

Hey BP, I need your help. I just secured a contract on a 5 unit residential building in the NW corner of Missouri in a state college town. I Have clearance from a local lender that will provide 80% if I come up with the 20%. I can make this happen from pulling from some retirement investments and a HELOC, but these seem like the last resort as it would hinder further deals. This is a value add project, increasing the value $60-80K, primarily by getting rents up to market rent. There is also the potential of splitting a huge unit into two separate units for more value add. Below are some additional ideas I have to come up with my 20%:

Interest only debt partner with a healthy interest rate (roughly 10%) for 3 years.
Using another property I have (7 Unit) as collateral. I have roughly $150K+ in equity in it.
Refinance my 7 unit property and pull the cash out to fund this deal.

What do you think my best option is? Is there another option that I'm not thinking about and should consider?

Stephanie P. · Answer

Not really. Most banks are pretty tight when it comes to forced appreciation even though it's natural for a property that's been renovated to command better rents.Even some portfolio lenders require a 12 month seasoning to use the appraised value. Having said that, others don't require any seasoning as long as you can show that you renovated the property, but the rate won't be in the 6's like a bank. More like 8% or so with a couple points.

Michael Sontheimer · Answer

Refi your current property. If you COULD afford to pay a hard money lender/partner the down payment at 10% over just 3 years, get a refi for 15 years and make payments as if you were paying the HM lender. Of course if you find another deal and down't want to pay those high monthly payments, you can always pay the minimum. The payments for a partner/private lender over 3 years will be MUCH higher and decrease your flexibility if you find another property to invest in.As far as banks, shop around and make a new post on BP specifically asking for banks that do what you are looking for in your area (or Kansas City which is big and has lots of BP members). I am sure you can find one that will refi your property and get you the money you need for this new deal.Best of luck to you!Michael

Jake Riordan · Answer

Maybe try to get a family member to loan you the money without giving up equity. I just don't like giving up equity unless absolutely necessary. Maybe see if owner is up for 10% financing. I also use Bank of the West in KC & they have a 10/30 & a 15 year fixed, but not sure that helps you any. Personally, I would finance it myself as much as possible & then very aggressively pay down the Heloc/401k. Maybe use a personal loan from a bank or family/friend to pay for some of the rehab, since then you don't have to deal with them on the loan.

Stephanie P. · Answer

@Matt CrawfordIt's a no brainer. Refinance the 7 unit for the cash for the 5 unit. DO NOT cross collateralize. It will be hard to untangle the properties down the road.Stephanie

Ruchik Gandhi · Answer

@Matt Crawford Another option for you could be to combine the 5 unit property and 7 unit property together and go for a portfolio loan. That way you can cross-collateralize the equity and even get a cash out in certain cases and finance the new acquisition while keeping LTV low to attract better rates. Let me know if you need any help crunching rough numbers.Ruchik Gandhi

Pat Jackson · Answer

I think that’s a good question. What rates have you been quoted from various banks?

Matt Hurley · Answer

@Pat Jackson I think the worry is less about the rates and more about where the 20% is coming from. @Matt Crawford, the partner approach is always a nice one...when you have the right partner. That takes time, and a whole bunch of networking. My local REIA has a "Rainmakers" group where investors present deals and areas of focus, people give a short presentation of what they're looking for. Any options like that in your area? For #2, has the lender said they would give you a 100% loan IF you gave collateral? What are terms? If so, that sounds like a good deal IF the 5 unit is a good deal. Maybe post some more numbers about it? How much $ is that 20%?#3 this is also a good option, IF the refinance doesn't cause your 7 unit to go into greatly reduced or negative cash flow. again need numbers here to see if this is an option. HELOC: do you already have a HELOC? If you're thinking about getting it on a commercial property that's not an option, residential only. Overall, I think you need a lot of numbers work to help you choose the right direction. Once you have a spreadsheet side by side of each option and long term how much it's going to cost you, you'll have a clearer path.

Matt Crawford · Answer

Thanks @Stephanie P. for the input. I Did a complete rehab on the 7 unit within the last two years, forcing much of the appreciation. I essentially want to do the BRRRR strategy on this property... The two banks that I have talked with are uncomfortable loaning out on "unearned equity"... Any suggestions on finding a bank that is friendly to the BRRRR strategy?

Matt Crawford · Answer

Thanks @Ruchik Gandhi for the input!

Matt Crawford · Answer

@Matt Hurley - Great questions! I think your right, partnerships can be great things! I am open to considering this. 20% is $50K. I have roughly $175K in equity in the 7 unit based off of a 9 Cap rate. I do have a HELOC on my personal residence. The 7 unit is cash-flowing nicely right around $2,200/month.