All Forum Posts by: Justin Chan

Hey Justin, 

Most hard money lenders will want to do a cross collateral loan on a property in the same state. I have not heard of any commercial banks offering a LOC on a mixed use or any second mortgage. Lending is tight now, so it may be tough to find.

Have you looked into just doing a cash out instead?

@Justin Chan

What we have done in the past is do the loan and with a personal guarantee we have been able to do an indemnity deed on the other asset

For example we lent out money on a Brrr property to an LLC, did a personally guarantee and then an indemnity deed on another property so we were locked in that lien position on the other asset because it had substantial equity.

Upon completion of rehab the borrower will refinance which will satisfy the loan

Happy to chat further

I'm always a bit apprehensive to cross-collateralize, primarily because it might be difficult to do a partial release if you want to sell one of the properties that are involved. We just closed a construction loan where our borrower was building on three side-by-side-by-side lots. We built in a clause where they could pay 120% of the proportional amount to release each property as they sell. Definitely think ahead about that scenario if you decide to blanket multiple properties on one loan. 

Cross collateralization generally is 80% loan to value on the initial property. Getting a residential appraisal with the comparables you need is difficult as not many mixed use properties under 4 units close in a given city. Get a realtor to pull some comps- closed sale with a loan in past three months with the same mixed use, unit count, and square footage in past three months. 

Keep the existing loan until the cows come home 2.75 is almost like free. FHA with deed in LLC is a recipe for trouble, when you recorded the transfer deed to LLC it's considered a sale by the FHA/HUD rules. Also your insurance coverage had to remain in the person's name and loan number as a residential policy but the LLC changes the hazard insurance to need a commercial policy. If lender or servicer finds out that you aren't fully covered they will put force place insurance and they have the right to call the loan.

If you plan on putting everything you have into this deal with rising rates and uncertainty of a time line on the actual upgrade of the neighborhood then I would say it's risky. If you can do the work yourself and get the property dirt cheap then maybe it's worth it, but you need a lot of wiggle room on the numbers to make it a safe first deal. But if you see the upgrade coming it could be a major win in a few years. What is your personal risk tolerance? What is the maximum mortgage that rents could support after you cash out? No point in creating a 200k property if the rents can only support a 120k mortgage. 

@Justin Chan - I actually did very well investing in areas that are on the edge of much more expensive areas. Eventually the neighborhood changed and prices increased dramatically - not saying it happens in all areas - I would say just make sure that the yield makes it worthwhile. If not than don't rush wait to see it out and perhaps prices adjust. 

I would say differentiate between where you personally want to live and where is a good investment as they are not one and the same.