Before a lynch mob is dispatched…let me clarify: I’m still a huge proponent of real estate investing! It’s just that residential investments rarely cash flow…you have to wait to make your money at sale from appreciation. And you can’t afford to have someone else manage the units for you in most cases. Banks limit you on how many residential investment loans you can have…but they don’t care how many commercial loans you have active.
Take Off Your Training Wheels-
Rumor on the street is that banks are again permitting a prospective borrower to have up to 10 residential loans. Legally you
can have as many as you want of course…its just that lenders won’t underwrite loans past 10 residences. (This is a reversal from a year ago when Freddie Mac tightened up standards to permit only 4 loans. Fannie Mae adopted the stricter rules shortly thereafter.)
Will the banks change course again and tighten up standards anew? Rather than shout: “Hurray!” and buy more residential investment properties, I advocate a different strategy.
Convert your multiple residential property equities into a single commercial investment.
Here’s an example: I have a friend that has 10 single family homes, nine of which are investments. He holds many of them “free and clear” while others have small balances. He can sell off some of the homes and use a 1031 Exchange to defer taxes, converting the proceeds into equity for a commercial property downpayment. He can also put new loans on the remaining house to add still more. Banks are currently writing loans of up to 70 to 80% LTV on investment properties where cash is being taken out at refi. When this is done my friend will easily be able to acquire sufficient funds ($250-350,000) to buy a commercial property like Heather Joy, currently listed at $779,000. The advantage of Heather Joy is that he will be able to manage 8 units by going to a single address…a significant improvement in efficiency.
The next step up would be to take an even greater portion of his existing portfolio equity and purchase a larger asset like the 18-Unit South Towne. That $1,150,00 property would require approximately $350-450,000 in equity to purchase. It has enough units that we could now afford MBO…Management By Others. That means that my friend would transition from running all over town to manage 9 single family homes to reviewing the results created by the management company.
To take this further…if my friend’s holdings were enough that he could combine equities to add up to $1,200,000…he could purchase Los Verdes, available for $3,200,000. That property is large enough to not only have management by others…but an on-site manager. Contrast owning 53 units in one spot that are managed by someone else vs. running all over town to manage and maintain 9 single family homes.
Summary: You will make more money, receive it earlier, and have fewer headaches…when you transition to Commercial Real Estate Investments.
Call Rick Bean at Rose City Commercial Real Estate for a no cost, no obligation assessment of your investment options.