Years ago I had owned a couple of rental properties and while they were cash flowing, when I had financial needs I sold them. One was in a rundown area and I just couldn’t see the area improving so I felt like it was a solid decision.
I have started to miss my rentals and I have been considering getting back into it. I appreciate this site and the attitude that many of you have. Just reading here has helped me see that I never was looking at my rentals the right way and it was by the grace of God that they were cash flowing. Thank you for the education. Special thanks go to javipa, Gold River and motivatedceo as your posts are usually very informative.
On my former properties, I had always paid cash so I am not real clear of how to do what I want to do. I would appreciate your input. In a few months I will receive a bonus of 20k cash. I would like to leverage as much of OPM as possible. I have found a few deals that have a debt coverage ratio of 1.75 or better with 20% down. But the most profitable deals that I have found are all between 40K and 55K. I could buy one but two is always better right? Mortgage rates are great now and I would like to use my 20k as a down payment on two properties and get conventional mortgages instead of using something more expensive like hard money. Does this seem reasonable? Would a lender freak out that I am trying to get two mortgages at a time? I also understand that many lenders don’t like to loan below 50K. I am self-employed and make something like 70k including bonuses and have a credit score of 729.
So how do I do it? How do I buy two rental properties worth 40-55K each with 20k in cash?
I don’t know if you’ve read my posts or not, but I’ve yet to mortgage over 30k per SFH. I do these loans thru smaller local banks which don’t have a 50k minimum like some of the big banks. I do commercial (or portfolio) loans. These are shorter term loans with a little higher interest rate. Since you have prior experience, you’ll probably have decent luck trying to get the loans you’re seeking. I’ve had banks want anywhere from 0-15% down for these loans. If you take this approach, I think what you’re trying to do is completely reasonable.
Thanks Justin for the suggestion. I have read your previous posts but I discounted a commercial (or portfolio) loan as being more complicated (form series LLC for each property, get an EIN for each LLC, open bank accounts for the individual LLCs, form a business plan and then apply for the commercial loan which didn’t seem likely on a newly formed LLC :shocked ). The terms didn’t seem to be as good (3-10 years at 6-8% versus 15-30 years at 3.5-4%) so I really never considered it. I have read here that there are investors with 6, 7, and more mortgages at a time; I just figured that was the way to do it.
While I never had a LLC on my properties before (oh my!) now that I have been reading here, I realize that it is something that I need to do. Maybe I should go ahead and do that before I do anything else.
Is that the way that you did it? I remember that in the past few years you have amassed quite a few properties and I would love to hear your experience.
If you’re going to form an LLC anyway, the portfolio loans may be the way to go. My wife and I still have to personally guarantee each loan. The banks still won’t loan just to the LLC alone even though we’ve been at it for five yrs. In the beginning, I set up the LLC in Illinois as having the ability to form series LLCs because Illinois was one of the states that offered that and I thought it would be a good idea. We never bought any more property there, so that point didn’t matter. In the beginning, I didn’t realize the LLC did not provide complete liability protection…just ignorance on my part. You could set up series LLCs if you want, but like you said that’s a lot of EINs and bank accounts. We still just have the one LLC, but we carry the maximum liability insurance on all our properties. Also…don’t make the same mistake I did and think you need to use one of those companies to help you form an LLC. If you can fill out a couple forms for the state, you’ll be just fine. I don’t find the value in having someone else file the articles of organization and file for an EIN. Once again, a newbie mistake on my part.
For financing, yes there are people with conventional type loans at a lower interest rate but they have the mortgage limit as well as required reserves. We don’t have any of that. It’s nice knowing our loan limit is just what the bank is comfortable lending to us. We have one bank that has loaned on 17 SFHs and a duplex and they’re not done with us yet. I also think you’ll find that the interest rate on a 10 yr am isn’t as important as it is for a 30 yr loan. I really like the shorter term loans. We’re still able to cash flow well and things will be paid off sooner than later. For the smaller loan amounts, I think it’s the way to go.
Thank you for your helpful answers Justin. I really appreciate your helpful attitude.
I am really warming up to the idea of a portfolio loan. I especially like the idea of paying it off earlier than a full mortgage. However, after doing some number crunching, it looks like changing the loan from 30 to 10 years and increasing the interest rate to 6% absolutely clobbers the monthly profit. (This is on properties that have a debt coverage ratio of around 2 on a standard 30 year mortgage.) I have tried adjusting my numbers in a variety of directions and it just seems like I am doing something wrong. Do you have any specific examples that you would like to share?
I spent some more time today researching LLC’s and think I wound up with more questions than answers. I am a resident of Texas but I would like to buy property in Georgia. (I have a lot of connections to Georgia). Texas allows series LLC’s, Georgia doesn’t. I was thinking that I would form my LLC’s in Texas and the individual LLC’s would file a DBA in Georgia to buy the individual properties there. Does this seem right?
Another thought is to just form all of LLC’s in Georgia as independent LLC and buy 1 property per independent LLC. However, it seems that because the LLC’s are independent I would need independent portfolio loans for each one. This just doesn’t seem right.
Thank you Justin I appreciate your help. To the rest that may read this I pose these questions to anyone who may have experience with these things.
We’ve bought several properties for between 15-25k and mortgaged that amount for 10 yrs. Most of these places rent from $500-650/mo. Mortgage payments are around $200-300/mo per property. Taxes range from $600-1100/yr. Insurance ranges from $225-400/yr. Interest rates are between 5.65-6.5%. So some properties are a little better than others, but it’s all about volume. If you can do this over and over, you should make good money and everything will be free and clear sooner.
The LLC we started in IL is the only LLC we have. We use a DBA name in MS, but it’s all still owned by the same LLC. In the beginning, I thought we’d have separate LLCs for each property (I especially liked the series LLC idea) but that’s a lot of expense for each LLC as well as the separate bank accounts. That’s just a lot of extra work and accounting that I’d rather not deal with. Some people recommend grouping properties into LLCs by property value (like holding one million dollars worth of properties in an LLC before starting another one). Those are some decisions you’ll have to make.
Mark Wagner (mcwagner on reiclub) is our CPA, a friend, and really smart on this stuff. Hopefully he’ll chime in here for you regarding LLCs in TX and GA.