Growth using equity in rentals - Need advice - Posted by Jay(TN)
Posted by Jay(TN) on August 05, 2003 at 21:14:56:
Hi all. I’ve had a great year with my investing work. I’m finally getting over a whirlwind of work, and now I’m thinking ahead.
I jointly own (with father and brother) several single family rental properties free and clear. The cash flow is good, of course, but the return on investment is rather puny. I want to expand and purchase more rental properties. I am single and 27 years old, and I am planning for a future when I can support a family and have more free time (a precious commodity now). I have the full support of my parents and brother, and we are all working hard.
Here are some options:
Acquire first mortgages on the free and clear properties and purchase other rentals with the cash. Pros: I can act quickly on new properties. It’s a simple plan. Also, I can lock in while rates are still relatively low. Con: does not net the greatest return on investment(i.e. buying a property with cash and not using leverage). Another con is that if I do not use the cash out, I still have a mortgage payment.
Look for a small bank that will use one of the free and clear properties as collateral for other purchases. For example, I can use one existing property as collateral to purchase say 2 or 3 new properties. The new properties will be acquired at a discount, and I will renovate to increase the value. The small bank will have at least 15-25% in the new property, as well as holding the deed to my existing rental. Pro: I do not pay a mortgage payment on the property used for collateral. The bank finances my deals at 100% of purchase price, but they still have collateral and equity in the new property to protect their interests. Con: They hold the deed, and I lose access to equity.
Obtain a line of credit on a free and clear property. I noticed a few banks will give investment line of credits up to 70%LTV with very low starting fees. I can use the line of credit to pay down payments on new properties. Pro: only pay when I use the LOC Con: Hmmmm. I would just need to season the funds to make sure a lender does not balk.
Option 2 sounds good because the bank will preapprove me, in a way, to purchase new properties. Assuming the small bank is not interested in jerking me around, I will have carte blanche to go after a lot of deals.
I’m busy now, but with things slowing down in a few months, I want to have a gameplan. I’d love to hear any comments. As far as I’m concerned, it is not an issue of IF I will grow, but how and in which way. The next steps will be very important, and I would appreciate any advice.