Funding Downpayment/Loan options using existing properties

[Katherine Bremner]

Hi BP Friends!

I’m a new(er) investor in Wisconsin in need of some advice on how best to fund an off-market 8 unit (long-term). Purchase price 700K.

A little about me: W2 job (160K), credit score 800, ~600K in 401K. 3 duplexes nicely cash flowing at 500+/door in Wisconsin, 3 other cashflowing properties in Illinois. All of the investment properties have 30yr mortgages with low interest rates (3.25-4.50), three units have been renovated (one was a major update/full gut), so I have some equity I can pull out. Properties were all purchased within the last 2yrs. No commercial loan experience. My preliminary numbers have DSCR at 1.23%

Question: How best to fund downpayment? Should I cash-out refi a few of these properties? Should I borrow from my 401K? Is there a loan product that I can combine mortgages and cashout (cross-collateral?)

Thank you!

[Marcus Auerbach]

First choice is always to leverage the subject property. Your seller is likely an educated investor which makes a discussion about seller financing much easier, they know about the tax advantages etc If you can come up with 10% down, the seller can take 10% or more in a secondary note and the rest you can fund with a commercial loan.

Second option is a HELOC on your personal home, easier to get and lower in cost than lending against investment properties. Secondary loans on rental properties are tough, especially if the 2nd position lender is a different bank than 1st. And you don't want to give up you 30y loans.

Third option is to raise private money, preferably family money. Stock market does not look great and a lot of people like real estate, but don't know where to start. It can be savings, but you can even use someone's 401k. Family trusts you and know your abilities and personality. A lower rate like 6-8% is usually fine, if you offer a higher rate, people assume the risk is high, so actually counter productive.

I am normally an advocate of smaller local Milwaukee banks like Waterstone, Equitable, Waukesha State or Washington State Bank, but at the moment credit unions seem to have the best commercial rates.