All Forum Posts by: Mark B.

@Brent Coombs Of course, noted and agreed. Naturally the example was a hypothetical scenario where the financials and ratios would all be sorted out for all scenarios between 60-100% leverage. The properties I'm purchasing now cashflow ~$100-150 per door after CapEx/Maintenance/Vacancy is accounted for, with 20% down, but I'm essentially buying retail at this stage which is a compromise of sorts. Not to mention putting in my own equity, not forcing appreciation, not having the luxury of being able to refinance out, etc. My thinking on the matter is if the process is easy enough it would offer advantages certainly over HML and equal or exceed HELOC. And yeah, obviously the numbers all need to stack up the right way for any of it to work. But in a perfect situation with the right deal I should theoretically be able to at least match or more likely exceed that cashflow my current traditional financing situation using this financing model with little cash out of pocket left in the deal after refi. That's why I was curious if there was something I missed in my research that would lead to nobody using and/or discussing this method on the site (or anywhere else in detail really). I realize this isn't reinventing the wheel, it was just something I hadn't seen discussed specifically so I was hoping to get some insight into whether or not it is as workable as other methods. As always due diligence will help make the numbers work, I was more interested if there were complications on the SBLOC side of things that I'm unaware of. Thanks!

I haven't seen much if any discussion of this type of funding anywhere on the site or forums so I wondered if anyone had experience. It seems like it could be a good method to fund BRRRR properties in lieu of hard money, a HELOC, or other options of that nature.

For those that don't know, a securities backed line of credit is a LOC that is made available to borrowers that have significant funds in their retirement/brokerage accounts. Firms such as Morgan Stanley and Edward Jones call these different things, sometimes Liquidity Access Line, etc. But they're all essentially similar vehicles. The idea is, for round numbers sake, if you have one million dollars in total invested funds in your 401K, IRA, etc. accounts the firm would offer you a line of credit up to a percentage of your held assets. LTV ratio varies, sometimes they'd give you as little as 30%, other times as high as 95%, from my research it seems that you'd get somewhere in the region of 65% max credit line. So one million of assets in a Morgan Stanley account would theoretically qualify you for $650K as a line of credit. The interest rates are pretty low, fairly close to prime and they go down lower the more assets you have and the higher the line of credit is. Since it's essentially very much a secured asset that the line is based on. The payment plans seem very generous too. You can use it as if it were a credit card, and pay variable interest and they offer interest only payments. Or you can take a set amount for X number of years. The main danger of this type of lending is that if the stock market crashes and your LTV drops significantly as a result (i.e. you have a $650K LOC based on $1M in assets, the stock market drops 50%, your line of credit eligibility drops in half to $325K, so if you have loans out for most of your LOC they could call them due immediately or require you to add significant cash to your account to cover the margin of difference. I don't understand the ins and outs entirely hence my posting here, but that is the long and short of it. It could be a great deal, and it could be very risky given a market drop and irresponsible borrowing/over-leveraging.

All that said, does anyone here employ this technique for acquiring properties, specifically BRRRR properties? I'm currently buying properties out of state and having them managed so it would be challenging to attempt the BRRRR strategy currently (especially the first time) without having significant boots on the ground. But as I continue to build my portfolio and continue to increase the funds in my retirement vehicles I'm wondering if this would be a good way to employ BRRRR once I move to the area where I'm investing as I intend to do in the next couple of years.

My thinking is that theoretically when I'm ready to start on some projects, based on my holdings, I would be able to get an SBLOC for ~$250K which I would only use a small percentage of. For instance, doing two projects at the same time. For the sake of simplicity in a hypothetical scenario we'll say $40K purchase x 2, $30K rehab x 2, ARV of $120K x 2. So total money accessed from the LOC would be $140K which would seem a low enough utilization to avoid anything except a doomsday Wall Street scenario where the stock market drops 50% overnight. And since the vehicle I'd use would be interest only, I'd be only paying the 4-5% interest for the holding/seasoning period before hopefully re-fi'ing out to pull the capital out to repay the LOC. Rinse and repeat. Obviously the benefit to this would be that the interest is significantly lower than using hard money, plus you act as your own underwriter more or less which simplifies and speeds up the process. And getting these lines of credit seems to be fairly simple and you can have access to the funds in 24-48 hours, and don't have to apply/re-apply each time, and it acts like any other revolving line of credit in that you can reuse it over and over so long as you're able to manage it efficiently. So in my hypothetical perfect world scenario, the numbers would look like this for two SFH BRRRR projects happening simultaneously:

Cash Purchases: $80K

Rehab: $60K

ARV: $240K

Refinance 70/30 LTV: Pull out $168K, repay $140K SBLOC, $28K extra left over

or Refinance 60/40 LTV: Pull out $144K, repay $140K SBLOC, $4K extra left over

Obviously the numbers will vary wildly with holding costs, closing costs, etc.  But this is for illustrative purposes only.  Holding costs in this scenario wouldn't hurt so bad if six months seasoning is required since the interest is low and that's all you'd need to be paying monthly, in theory.

All that said, does anybody do this currently? If so, what has your experience been like? Am I off base on any of the information I've gleaned? Obviously there are lots of ways to fund BRRRR purchases, I'm not saying this seems like the best, but it seems to be one that could align very well with my finances. Again, the above scenario represents a "nothing hits the fan" situation which rarely ever happens so I'm well aware that the realities will be very different. But I'm mostly curious about the workflow of doing such a deal and if there's any major differences to using a HML or a HELOC funding for these types of deals. Any replies would be much appreciated. Thanks in advance!

@Chris Mason 

Wow, sounds totally manageable, just a matter of finding the right lender I suppose. We're actually buying the properties in Ohio where I'm originally from and having them managed, and plan to move back there in a few years. But I'm working on building a relationship with a local lender there hoping that I could slide into the portfolio side with them. But I know they have no overlays beyond the standard stuff. So yeah, I guess it's just a matter of getting her finances sorted in the next six months so when the time comes to move on the next few it all makes sense. She's got ~$25K in an IRA already in her name so that should cover the required reserves. And we keep all of our money in a joint account already so that will be handled as well. I guess I hadn't even considered this as an option, thinking that no income equals no go, but I guess if you find a lender that understands what you're doing and all the numbers, scores and reserves line up and conforms then it does make sense. That certainly makes things a hell of a lot easier going forward, just gotta find the right lender but at least I'll be able to enjoy those conventional rates for a little bit longer than I initially thought. Really appreciate it, thanks again!

@Chris Mason

 @Chris Mason Ah, gotcha, that makes sense and we've kinda already done that.  We have no consumer debt other than our primary mortgage and the investment properties. They're all in my name exclusively, and 100% of my income is from 1099.  As a result, she doesn't have much credit history to speak of but I have her added on as an authorized user on the couple credit cards I use.  But those are always under 10% usage and paid off in full monthly when due.  Since we've ticked that box seemingly already what would be the next step?  Would be very interested in learning how that could work potentially because come January I'm going to be ready to buy 2-3 more properties and I'll be maxed out so I was going to go the portfolio route but if there's a relatively easy way to swing it I'd be all for giving it a shot.  I'd always heard it wasn't possible if she had zero income but your experience says differently so I'd love to hear your thoughts if you had a spare moment.  Appreciate the reply, thanks so much!

@Chris Mason Sorry, meant to tag you.  Thanks!

Chris, wondering how you would structure that kind of scenario.  My wife works from home on our home based business, all of the income from that is under my name as 1099. I'm getting close to my personal limit of 10 now.  She has zero income on the books technically but my substantial income plus our rentals would more than qualify us to get up to at least 10 loans each.  Just curious what the game plan was.  My only hypothetical solve would be to swap our payment processor 1099 into her name for the year prior to applying for loans so she has that income.  But then that may not look as good as it's only one year of income versus 7 consecutive years at that level for me, I know 1099 self employed are subject to more scrutiny so I'd rather keep it the way it is if I can help it.  But it'd be awesome if we'd be able to get 10 under her name as well rather than going straight into portfolio or private lenders after I'm maxed out.  Would appreciate any info or guidance you might have.  Thanks!

I would never, ever rent to any family let alone this aunt. So everything is contingent on getting her out immediately once things are put in motion, and the contract would be very specific in those terms. She would rather stay, but getting cash in hand to leave would definitely grease the wheels.  This was my grandma's house but it's a disaster right now and I'm in no way sentimental about it. I just see it as a deal within my field of vision that could work out for me. 

I am getting it at a discount. It'll be the equivalent of purchasing for $63-73K once the debt and relatives are paid off. That's a $100K discount off ARV, as long as the rehab falls within those numbers it seems to fit well within the 70% ARV rule. Unless I'm missing something? I can get the financing no problem. Would the process of doing a short sale be a nightmare because it's not arms length? I'm considering doing it that way because assuming the loan seems like the smoothest transition and paying a little to the family will grease the wheels and there won't be any hard feelings about them not getting anything out of it. That's not a mandatory part of the plan but the numbers make sense enough and I'd feel better paying them something if I can do so within the context of the deal.

This one is a little complicated but I'll try to be as brief as possible. My grandmother passed away last year and the title transferred to my father and his brother and sister equally. My aunt still lives there, my uncle has basically washed his hands of it and has no interest other than hoping to maybe get some money out of it eventually. My father has no interest in the property at all and we've talked about me getting involved. The property is very distressed, it's in pre foreclosure, no payments have been made for over a year. It will likely need a gut rehab. But it's in an A neighborhood, Zillow estimates put it at $168K, recent comps speak to that. Obviously that would be in good condition, in the shape that it's in they'd be lucky to sell it for maybe $50-75K to an investor.

That's where I come in, my aunt is in the process of seeing if she can assume the mortgage and be responsible for it as long as my father and uncle sign off on their interest in the property. Problem with that is my aunt is more or less disabled, on SSI and brings in ~$733 a month on assistance. The mortgage alone is $450 a month so I'm doubtful the bank would sign off on her assuming the mortgage anyway with such a high DTI and especially given the fact that she's the one responsible for the home being in pre foreclosure in the first place.

My hypothetical scenario would be to come in and try to assume it myself, I'm more than qualified financially and I own 6 other properties already, have very low DTI. I've read that if a mortgage is assumed by a relative that it may not trigger the due on sale clause on the mortgage. That would be optimal obviously. I would consider giving each of them (dad, uncle, aunt) somewhere around $5K to wash their hands of it. And my aunt would hopefully use that money to find a cheap apartment while she looks for government assisted housing which is all she's ever going to be able to afford anyway. My logic for the family payoff would be that's probably the maximum they would get if it foreclosed and was sold for more than was owed anyway, but likely would end up with next to nothing at all.

I would then pay the holding costs to bring the mortgage up to date, pay the liens (~$10-15K for nursing home and something else), and then come up with hard money or private lending to do a gut rehab of the house in order to rent it out. Market rent would be $1,300/month. Gut rehab would probably be somewhere in the range of $40-50K. Once that's done I'd probably refinance out to pay off the hard money/private loan and be left with a loan for $100K or so with an appraised value of $168, so that would put me comfortably at about 40% equity. The numbers make sense, I think it could all work, it's just a matter of getting everybody on board, I have a good relationship with all of them it's just more the ability to make it work for all of them. My dad has said he wouldn't take any money from me, but I wouldn't feel right about that, to my uncle $5K would be life-changing money, and to my aunt hopefully $5K would be enough to stabilize her until she can get permanent section 8 or something to that effect. I know she would rather stay in the house but that seems utterly infeasible given her situation.

Numbers would be something similar to this:

Remaining Mortgage: $35K

Cost to Make Current: $8K

Liens: $10-15K

Family Payoff: $10-15K

Gut Rehab: $40-50K

Total Project Cost: $103K-$124K

ARV: $168K

Refinance @ 60/40 LTV: Pull Out ~$68K/Remaining Loan $100K

Property Tax: $2700/year

Insurance: $1000/year

PITI @ 5% interest: $845

Post-Rehab Gross Rent: $1,300/month

Obviously could go lower on the LTV to pull out more cash if necessary, but this scenario would put me at $35K-$55K out of pocket which is essentially the same as a 20% down payment on the similarly price property but it'll be completely renovated so should make for a great rental with very little CapEx and maintenance early on. This would give me ~9-13% COC return. Which is what I'm getting from my rentals in a C neighborhood with very little appreciation chance. But this is in an A neighborhood where the property values have appreciated ~25% in the last 5 years on average. Positive cashflow after would be in the $300-450 range per month I'm guesstimating. Obviously less including CapEx, maintenance, vacancy reserves. Would probably self-manage.

Has anyone gone through something like this before? I realize it's a lot of hoops to jump through, but to me it's not really much different than any other fix/flip scenario other than it could be as good a deal if not better. Are there any hitches that I'm not seeing? Are my rehab costs way off? I've heard $25-35/square foot for a base level gut rehab but I don't know if that's accurate. The house is ~1,500 square feet. Obviously I'd need to get contractors in to assess the property to see if it's even possible because it's been very much neglected over the last decade. I didn't factor in holding costs or hard money/private loan costs for the rehab portion because I'm unsure of those right now. But at a base level, does this kind of endeavor make sense? Or is it as close to a wash as possible that I'd be better off just buying a property without so much work required? Any help or tips or assistance would be much appreciated. Thanks so much!

I have purchased 4 "turnkey" properties in the past 8 months through the same company and overall I have no major complaints until recently.  One of the properties is in a somewhat better suburban B/B- neighborhood.  What I didn't know is, in that particular city unlike the others in the C class neighborhoods, that this particular city apparently has an itchy trigger finger on issuing expensive violations.  They don't mandate the properties be POS violation free on sale like some other suburbs in the area do.  But instead of that they have building inspectors going out to inspect the exterior, sidewalk, driveway, chimney and are issuing violations, probably once the property was registered as a rental property.  I closed on the property in August and in March received six violations.  Some minor, but some very major ones, such as tuck pointing the chimney and replacing the damaged driveway and sidewalk.  I'm receiving estimates and we're talking about well over $10K.  This is a $60K property that I had already put $6K into repairs after being told explicitly by the agent that he doesn't see me needing to spend any money to get it rent ready except for a couple minor items, and he told me that the tuck pointing that came up on the inspection would be able to be deferred maintenance.  But nothing about the driveway or sidewalk issues at all.  And if it's not clear, the turnkey company is estimating, billing and completing all repairs.

I'm aware that I should be doing my own due diligence on every deal and I'm new at this, but I feel like I was misled and am being raked over the coals in this instance.  I'm not trying to be a slum lord but I am trying to buy properties that need a little bit of work to get up and running, but to be mandated by the city to put an additional $10-15K into repairs for a $60K house inside of a year of owning it seems a bit excessive.  And I feel like I was misled and not given the necessary information to make an informed decision.  I saw the property photos, I knew the driveway was cracked (but not destroyed by any stretch), and I knew the tuck pointing issue.  But I would expect a company to be up front and honest that a given city is prone to issuing violations and that X, Y and Z are cause for concern because they'll expect you to fix them quickly and they're costly repairs.  

The money isn't the issue, if it's mandatory to fix these issues I'll do them.  Although the city mandating that you have to replace an entire driveway rather than fixing it seems slightly overstepping.  But my real issue is determining how to discuss this with the property management.  I do feel like I was given misinformation, misled and not furnished with the knowledge that they should provide as a real estate agent that would have helped me make an informed buying decision, knowing all the circumstances.  I had intended to purchase 6-10 additional properties per year for the foreseeable future but now I'm concerned as to whether or not this company is looking out for my best interests, but if everything continued to go well there would be no stopping me from continuing to work with them and procure dozens of properties over the next handful of years.  I'm aware that I can chalk this up as an expensive learning lesson and move on, but I'd love to hear some perspective from anyone who might have something to add.  Any help is much appreciated. Thanks so much.