Getting equity out of rental property

[shader112]

Question for those of you that are in real estate or banking.

I started buying rentals right after college. I currently have 3 duplexes and live in one. 3 seperate mortgages.

With what I've paid off and appreciation there is a significant amount of equity in them.

I want to buy into my company and need a bunch of cash. I would like to get a home equity loan or other 2nd position to get cash. I could refinance them back into a 1st position but I've got intrest rates in the 2s and 3s that would turn into 7s or 8s.

But not many banks will do a second position note on a rental property. And for some reason the ones that do specifically won't do it on duplexes.

These 3 loans are my only debt besides a small student loan, and they cash flow with me living in one. Plus my W2 income and a 800+ credit score. I would think banks would bend over backwards to lend me money. But it's quite the opposite.

For those of you with experience in this, what is the best way to get the cash out?

 

[Marble]

IMO, you are playing a dangerous game with credit and are very leveraged. The banks probably also recognize this and will therefore be hesitant to get too involved.

I'm not sure what kind of company it is or the amount. Be curious to know that.

If it were me, I wouldn't have the rental debt at all.

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[BRTreedogs]

There's nothing that would be at a decent interest rate.
And you're one bad tenant away from disaster.

 

[Pwb199]

Well I can’t say it’s the best way, but here’s what I did.

I own a triplex, live in one of the units myself - and have a 3.5% interest rate. I wanted to take cash out to help purchase another rental, so I got a HELOC (unfortunately at 8%). Instead of paying it off over time however, I paid it off as fast as I could.

It worked well for me, and the equity in my triplex has afforded me a couple opportunities that I’m very thankful for.

Good luck!

 

[shader112]

IMO, you are playing a dangerous game with credit and are very leveraged. The banks probably also recognize this and will therefore be hesitant to get too involved.

I'm not sure what kind of company it is or the amount. Be curious to know that.

If it were me, I wouldn't have the rental debt at all.

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I'm actually sitting pretty good as far as debt to income goes. The rents cover all the bills and payments and I end up with a decent amount left over for the repair fund each month. And that includes my residence, so essentially live for free.
I'm an engineer and would be buying into an engineering firm.
I know some folks are very anit debt/cash only. But I wouldn't trade my low interest rate loans for anything. They are making/have made a healthy return.

 

[shader112]

Well I can’t say it’s the best way, but here’s what I did.

I own a triplex, live in one of the units myself - and have a 3.5% interest rate. I wanted to take cash out to help purchase another rental, so I got a HELOC (unfortunately at 8%). Instead of paying it off over time however, I paid it off as fast as I could.

It worked well for me, and the equity in my triplex has afforded me a couple opportunities that I’m very thankful for.

Good luck!

That's exactly what I am looking at for the place I currently live in. I have found heloc's at 85% and 90% LTV. But my issue is that that won't be enough cash. So I have been trying to see what cash I can get out of the other two. I've got one bank willing to deal on them maybe, but it's 65% LTV so there wouldn't be enough cash out to justify the expense I don't think.

Glad it worked out for you!

 

[McCrapper]

What will be worth more in 5-10 years, the engineering firm or one of those duplexes? I understand wanting to hold onto everything but sometimes giving up a little to gain more is necessary. It will be easier to repurchase another duplex in the future rather than the firm. Less risk more reward?

 

[IdahoElk]

Dave Ramsey said if you don't have the cash don't do it.

 

[Marble]

I'm actually sitting pretty good as far as debt to income goes. The rents cover all the bills and payments and I end up with a decent amount left over for the repair fund each month. And that includes my residence, so essentially live for free.
I'm an engineer and would be buying into an engineering firm.
I know some folks are very anit debt/cash only. But I wouldn't trade my low interest rate loans for anything. They are making/have made a healthy return.

That's good. I hope it works out. I do not do debt like that, and it's worked out well for me.

My brother in law is going to buy into an architect firm, and I think partnership is somewhere around $400k. I could be total off by that's what I remember. I'm not sure how that translates into what control/voting rights you get, returns on your investment, and liability.

Engineers are typically #1 or #2 in professions that become wealthy. I think this is a combination of good pay and a process oriented approach to building wealth.

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[TCUHunter34]

I would reach out to as many local banks or credit unions as you could to see what their current terms are. Find local investors in your area and ask who they would recommend. If your LTV is in a good enough position, you will be able to find a loan.

Also, see if you can find a DSCR lender. They’re a pain to work with because of all of the requested documents. They base their loan off of the rental income and appraisal. But you’ll find 30 year fixed rates through DSCR.

Try and find a contact directly with a lender instead of a broker. You’ll pay too much in points if it’s a broker.

 

[Marble]

Dave Ramsey said if you don't have the cash don't do it.

I agree with this, but there are a lot of people who use debt and are successful, but a lot that also ends up in bankruptcy. It's a risk that I'm not willing to take, but I would have probably taken more of certain events in my life didn't occur that caused me to stop using debt.

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[Marble]

I hope this doesn't turn into a debt bathing thread. I would like to actually see what the OP ends up doing and the process by which he does it.

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[shader112]

What will be worth more in 5-10 years, the engineering firm or one of those duplexes? I understand wanting to hold onto everything but sometimes giving up a little to gain more is necessary. It will be easier to repurchase another duplex in the future rather than the firm. Less risk more reward?

I think that is good advice, and I will go that route if necessary. It just hurts to think about giving up low interest money and a cash flowing property. But in the long run I'm certain the return would be better in the company

 

[shader112]

I would reach out to as many local banks or credit unions as you could to see what their current terms are. Find local investors in your area and ask who they would recommend. If your LTV is in a good enough position, you will be able to find a loan.

Also, see if you can find a DSCR lender. They’re a pain to work with because of all of the requested documents. They base their loan off of the rental income and appraisal. But you’ll find 30 year fixed rates through DSCR.

Try and find a contact directly with a lender instead of a broker. You’ll pay too much in points if it’s a broker.

Thank you! I have not looked at DSCR, actually I just had to Google it. One of my properties has a pretty high cash flow, so could be a great candidate for this. And on a 30 year my DTI wouldn't change much so wouldn't hurt my ability to get a heloc on my primary residence

 

[CorbLand]

You said you wouldn’t give up your low interest loans for anything yet you are asking about giving up your low interest loan to buy into a business…

Will your properties cash flow when your interest rate doubles on one?

 

[shader112]

That's good. I hope it works out. I do not do debt like that, and it's worked out well for me.

My brother in law is going to buy into an architect firm, and I think partnership is somewhere around $400k. I could be total off by that's what I remember. I'm not sure how that translates into what control/voting rights you get, returns on your investment, and liability.

Engineers are typically #1 or #2 in professions that become wealthy. I think this is a combination of good pay and a process oriented approach to building wealth.

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I've read a couple of Ramseys books, and I think he gives good advice for the most part. But personally I'd borrow as much as they'd give me for income producing property.

I hope it works out for your brother in law, from all my research if the company is on even a small upward trajectory the returns can be very good.

 

[Beendare]

Have you looked into a SBA loan to buy the business? I have never used one myself, but I have friends that have and as long as you’re not completely over your skis with debt, you should be able to get one with your good credit.

Selling off one of the properties kills you in taxes as you know…but for the right business opp,it might be worth it.

 

[shader112]

Have you looked into a SBA loan to buy the business? I have never used one myself, but I have friends that have and as long as you’re not completely over your skis with debt, you should be able to get one with your good credit.

Selling off one of the properties kills you in taxes as you know…but for the right business opp,it might be worth it.

I had not considered that, that may be an option. Thanks for the advice

The taxes are the worst part, if it wasn't for capital gains I'd sell one and be done with it. But that just doesn't pencil out. Obviously if I don't figure a way out that's what I will have to do

 

[schmalzy]

Dave Ramsey said if you don't have the cash don't do it.

I think for consumer level and discretionary purchases it’s words to live by, but if this was universally applied it’d be almost impossible to do a lot of business and eliminate a huge number of small businesses.

Edit: meant to add some context to keep on track. OP, I think buying into firm a smart move. I’d dump a rental before passing the opportunity, with the caveat that you’ve gotten to do due diligence and vet financials, hopefully with consultation of lawyer and CPA.

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[Yellowknife]

I just bought into an engineering business myself a few years ago. And then bought out a majority share this year. That involved a couple of deep dives into the financial aspects. My experience for what it’s worth:

Financing through a small business (SBA) loan was functionally impossible for me. High down payments, high interest rates (11%+), and very short paybacks. The cash flow would never have covered it. Bad choice for this application in my case.

Ended up doing what most people do in my case, which was negotiating an owner financing deal. Essentially paid for the business with a promissory note to the owner I was buying shares from.

That would be my first choice if done again, but selling or refinancing re-estate would be the second. Cash flow from a decently run engineering business should theoretically be a better investment than a rental. It should pencil out well.

Correctly getting an evaluation on the business is tricky and critical as well. Hopefully you have that sorted. Send me a message if you want to talk more specifics, and I’ll share my experience.