All Forum Posts by: Tom Stern

Quote from @Henry Clark:

@Tom Stern. Another avenue to check.  Use one of your existing properties to both leverage No downpayment and ask for a 2% reduction in the interest rate.  As long as you don’t plan on selling the old propertY you leverage then you’re fine.  Pick the smallest unit you have that will achieve the leverage.   Don’t tie up a $200,000 asset in a $50,000 downpayment and rate reduction move.  

Lenders I've talked with would normally agree to do 70% of the appraisal. In my case that would barely be enough to cover the down payment of 25% of the new MFH. So if I do this, I am tying down as much as I can from one of my properties and 'lose' the cash flow I have from it (lose is not the right term here, more like re-invest). Will that be something I can use to negotiate with the lenders? What is their motivation? I got several offers they were all pretty similar, would someone actually do a 2% discount to make this deal happen?

So this is a really good point that I'm also thinking about... I could take a loan against one of my properties and use that as a 30% down payment for the MFH loan. However, that means that I will lose my current cash flow from my property and I'm not even sure I will have a positive cash flow if I use the rental income for the loan's monthly payment. It is worth pointing out that I'm currently using some of the rental income I get to pay my own rent. I could do without it, but this means changing my whole investment strategy to maximizing equity and have no cash flow for other uses other than re-investing and up keeping. I am ruling out anything, just pointing out the fact this would be a big change. :) 

Quote from @James Hamling:

Speaking directly to your question @Tom Stern, yes your thinking in the correct direction. BUT, be very careful. 

It's all too easy to do incorrect analysis when placing such a down. To be fair to yourself, you should look at everything as-if you were doing things the "conventional" route of 20/25% down, and complete the analysis with that. If and when a "deal" is actually a "deal" under those terms, go for it, and the added down is simply "front-loading" your cash-flow, if that makes sense. 

Because here is the deal, doing 50% down, it's all too easy to make some foolish over priced purchases because "the numbers work". Well, to be fair, at 50% down, what doesn't cash-flow, right. 

I don't see why you'd have to be any more involved than you are now, why fix what isn't broken? We are only talking about an alteration in how you fund a purchase, adding in power of leveraged funds and the amplification factor it brings. Don't go changing the whole recipe that works, one alteration at a time right.  

100% Agreed that 'conventional analysis' is a good idea. The deal itself is financed either by a loan or 1031 (which I can't realistically see happening due to the complexity of several properties involved under a short schedule). The question still remains, is it worth eventually going for 20% down if the deal works and perhaps invest in multiple properties with similar conditions or go with 50% down and lower payments. Yet another option would be to take a loan against all the properties and buy a multi-family in cash. Honestly haven't looked at those numbers yet so I don't know if that is even a viable option.
Lastly, there is nothing 'broken' in what I'm doing. I made good ROI so far, however the original plan I had to use the cash flow to pay my own mortgage requires adjustment. This is my motivation.

The two options would be either a 1031 or a loan against the current property (or properties). I'm not sure how to manage a 1031 with 4 units and buy a suitable multi-family within the 45 days time frame + there are selling costs. A loan against my equity in one or several properties will allow me to use only 70% of the appreciale value. I need to do more research and probably some simulation in order to make sure which one I prefer. I also assume the interest rate will drop within a number of years by some amount, making the the loan not as bad as it currently seems.

I noticed that I made in unclear in my original post - The rental amounts are before expenses. There are management fees, occasional payment to fix or change an appliance, HOA fees and property taxes. Vacancy is very low, I had perhaps 3 or 4 months without full occupancy in all the properties combined in the last 10 years. I always buy a property that has a tenant, preferably someone who lived there at least 2 years and they usually stay for a number of years before they leave.

As for the suggestion to do 1031 exchange for all my properties for an apartment complex. This is something I've seen people do, but I think this can not happen in the FL market because the prices are too high. This means I would have to go to a different state perhaps and I would need to find another property management company. I just feel less comfortable doing that at this time. Trading up for duplexes is something I consider low risk.

I own four rental properties in FL, managed remotely by a management company. All of them were bought in cash. Total worth is around $850k - $900k. My original goal was to generate enough cash flow so I can buy a house in the (very) expensive CA region I live in (currently renting) without paying too much 'out of pocket'. Unfortunately things have changed in the last 10 years since I've started investing and it seems that reaching a point where I generate sufficient cash flow is too far in the future. So, I've decided to leverage my equity and current cash flow from rentals and 'up my game'. My current thought was to do an exchange with one of my properties for a duplex that costs about $450k, that will call for a loan for $200k and the property would generate around $5k monthly in rent. Even after the loan payment this should leave me with $3.2k which is more than the $1.8k I get on my current property. If this method can be scaled up I could potentially do this with my other properties as well and increase my cash flow about 60% - 70% (assuming the same math works).

I'm looking to hear advice from others that have more experience than me. I'm about 10 years into real-estate investing, but I kept it very simple so far and it worked out fine. However, I do understand that in order to generate more revenue I might need to do something a bit more involved.

Thanks!