Commercializing residential properties

[REIGirl]

I have a question about commercializing my residential properties. I was hoping to refinance everything and use the equity to pay off my primary residents, which I would then get a decent size HELOC on it that I could use to invest in apartment buildings.

I was told that I would likely have to commercialize my properties by putting them all in a holding company. This will cost approximately $100K in penalties and fees. Does anyone here have experience with this sort of thing or insights?

If we commercialize our residential properties and put them into one large bundle, how will it affect future refinancing or sale of any individual property within the bundle? Will it trigger penalties from the lender?

What are the tax implications of moving them to a holding company?

Will the new loan be reported in my credit bureau or the holding company credit bureau?

Would it free me up to be able to purchase more residential properties in my name?

Thank you!

 

[Thomas Beyer]

Blanket mortgages work as an alternative ie one large mortgage across multiple properties. Drawback: higher rates and lower loan to value.

Holding residential assets in a corporation works as you state but also higher rates and lower loan to values.

Commercial mortgages are usually 1.25 DCR. Run some numbers to see what a bank would lend.

Ideally discuss this with an experienced investor oriented mortgage broker with specific details ie rents, values and expenses.

To start: create a big binder aka Google Drive or Drop box folder with one sub-folder per property and a summary sheet to show overall numbers.

It probably does NOT make sense to pay 100k in refi fees.

Consider buying commercial assets instead: shopping centres, hotels, mobile home parks, apartment buildings, industrial warehouses, etc .. many other options.

 

[REIGirl]

Hi Thomas,

Thank you very much for your insight! We appreciate it!

We definitely are planning to start buying commercial assets, we were just thinking about how we can access our equity in our residential properties in order to finance the commercial investment. We were thinking to use the equity to pay off our primary residence and hopefully get a HELOC on it of approximately 400K which we would then put toward a commercial purchase; possibly an apartment that we could apply the BRRRR system

 

[Thomas Beyer]

Don’t be too levered. Debt has downside too.

Usually maximizing each property one by one with cheap 75-80% res mortgages sub 2.5% the cheapest way.

Commercial has four drawback
A) 2-4% upfront fees,
B) lower LTVs,
C) higher upfront costs for legal, appraisers, property condition reports and environmental reports ((could be 15-30,000) and
D) higher borrowing costs - unless CMHC mortgages for well located well maintained apartment buildings.

The main benefit is unlimited scalability & repeatability ie the asset qualifies not you !!

 

[REIGirl]

Thanks again for your much appreciated input!

We are trying to figure out how to access our equity and refinance, particularly in light of the ultra low interest rates, and use that equity to grow our portfolio, likely through commercial assets as it has become very difficult for us to purchase more residential properties....

 

[Thomas Beyer]

Thanks again for your much appreciated input!

We are trying to figure out how to access our equity and refinance, particularly in light of the ultra low interest rates, and use that equity to grow our portfolio, likely through commercial assets as it has become very difficult for us to purchase more residential properties....

Sell or refi - the agony and the ecstasy https://blog.reincanada.com/sell-or-refinance-the-agony-and-the-ecstasy/


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com

 

[REIGirl]

Good article! I think we will just refinance a couple properties at a time that have the least penalty. Put the equity towards are primary residence to pay most of it down and hopefully get a good size HELOC to use as seed capital to invest in an apartment building that we can add immediate value to. Thank you for helping us to think through this!