Leverage Equity for Purchase?

[KevinMurray]

Hi,



I currently have two properties with a decent amount of equity built up in both. I am looking to acquire a third property and have considered using some equity as a down payment. Any thoughts on this strategy or would getting a large line of credit or JV partner be a better option?



All the best

Kevin



Hycroft Group | www.hycroftgroup.com

 

[Thomas Beyer]

Both are good ways to grow, but the only way to grow beyond a few properties is with JV money / OPM !



The equity has to be cash for 3 month to qualify as downpayment for a third mortgage !



Get a large LOC anyway, even if you do not use it. When you know when you will buy put the LOC into a separate cash account so you can show you have cash as a downpayment - for three month minimum !

 

[Matt Crowley]

Hi Kevin,



I've been in a similar situation before. We had some completed houses with more of our own capital to place and joint venture partners interested in participating. At the same time, we didn't want to bite off more than we could chew by rushing the purchase of another home with the renovations were involved with.



Even though we didn't need the money, we decided to take on a partner. Recently, we have taken the same strategy again.



At the end of the day, I think this question is somewhat relative to what you are trying to build. On the one hand, it is hard to beat the cost of capital from a line of credit / matrix mortgage / HELOC. But on the other hand, if you have a stable property with proven performance, it may be an opportunity to interest a JV partner. Both are pretty solid options.



Debt financing carries cost advantages as well. If you have a 3.5% LOC and your effective tax rate is 25%, you experience a "tax shield" from the interest bearing portion of the debt



Effective tax rate = (interest rate) * (1 - tax rate)

Effective tax rate = 0.035*(1-0.25)

= 0.02625



Or, your effective tax rate is 2.625%. Hard to not make money on that one!



As you definitely know from your experience, there is a lot more to growing this business than the raw financial mechanics of an "optimal" portfolio...sometimes you have to give up something you want now for something good in the pipeline.

 

[Cory Sperle]

I would say to not go the JV route until you have a proven track record of delivering a predictable return to your investors, and the only way to do that is by selling the property. With 3 or 4 sales under your belt in a certain time frame you can then ask others to participate. In the meantime yes get the LOC you can from the two properties and buy a third only if you have enough cash buffer for emergencies or a downturn in the market to carry you through.

 

[KevinMurray]

Thanks for the feedback everyone!!



At this point I am going to get a large LOC and work with one of my interested JV partners. Based on your feedback and the reserach I did it seems like the most logical next step for my situation.



All the best

Kevin

 

[KevinMurray]

Hi Corey,



Thanks for the reply.



You suggest not going the JV route until you have proven yourself with 3 or 4 successful sales. The time it would take to generate the down payments for each property could take a considerable amount of time. I understand this is a long term play but I am trying to build a significant portfolio over the next 10 years.



How would you suggest acquiring the first 3-4 properties and selling them in a period of less than 5-10 years without JV partners? Unless the person has a large income or leverages their existing property I don't see how it can work`



All the best,

Kevin



Hycroft Group | www.hycroftgroup.com

 

[kfort]

You can always go the buy/ renovate/ hold/ JV route. You may just be able to double your input $ in a year or two while offering an easier and more secure transaction. Partner wouldn't have to qualify, you've improved the value so it will be lower LTV (thus more secure) and you've got a 12-18 month track record with that property.

 

[qdsouza]

My preference is always to refinance whenever possible, and where it makes sense cash flow wise on the refinanced properties, rather than only use the a secure LOC against each property. Especially if you a truly committed to buying the third property.



Good Luck,



Quentin

 

[Cory Sperle]

[quote user=KevinMurray]How would you suggest acquiring the first 3-4 properties and selling them in a period of less than 5-10 years without JV partners? Unless the person has a large income or leverages their existing property I don't see how it can work`





Hi Kevin, sorry for the late reply. All I can really say is that I personally would not invest with someone who did not have at least one proven sale with their own money invested. I saw many young people raise money, buy many properties with little experience, and were wiped out in the economic downturn. I took the slow steady approach, worked, saved and scrounged for the first down payment to buy the first house in 2000, then sold, reinvested, etc. I understand that joint ventures are the way to go if you want to grow significantly but if you buy the right properties and mange them well, your portfolio can grow surprisingly in a 10 year span. I also do real estate part time and have a full time job, so I can understand everyone's situation is different as well.