How Do You Get To The Really BIG Properties?
I have just purchased my first 4-unit rental property along with a partner. We did a lot of research and found a building that will cash flow right away, with 10% down. The financing options are great as well, 6.75%. My question is this: how do we get from this first property (we put down $40K cash each) to something BIG over the next few years. My long-term investing goal is to shoot for a building of 20, 30 or 40 units, maybe larger. However, as my building appreciates, so do the larger buildings as well. Do I bridge the gap by bying a bunch of smaller properties now, and rolling them all over, or is buy-rehab-sell what I should be looking at? Thanks for any help.
You might want to look into cross collateralization with the smaller properties to buy the larger ones. It will help with financing them and in some cases you wont have to put as much down on the property making it a more acheivable goal. I have friends that keep some properties just for that reason.
Good Luck,
Kyle
Kyle, can you explain cross colateralization more?
Cross collateralization is a term used to describe using one property to collateraize a loan on anothher property. Generally a lender will ask the borrower to pledge other properties as collateral, perhaps in addition to the subject property, in order to secrure a loan
[addsig]
Would this be a problem with properties owned via "subject to". We have ample properties and plenty of equity but the loans are in others name.
Sire
Thanks for the reply's. How would cross-collateralizing properties affect the down payment necessary? Would it make it possible to buy larger (commercial size) properties without the usual 20-25% down?
Thanks for the help.
Joe
You will have to ask Mr. Locke about the subject to issue.
Regarding cross collateralization and 100% down. I have done it. For example, I have a property with $500,000 equity and want to buy a $300,000 property. If I offer the lender a second on the one property and a first on the new one, he will have no problem. Be careful, however, lenders will take all the mortgages they can get. Do not give them more than you absolutey need to. In the above example I would be giving way too much. I mght be better off refinancing the first to get the new property.
Cross collateralization works well in situations where the cost of refinancing would exceed the benefits.
By the way, you can also RE collateralize a loan ( Keep the same note, just exchange properties) Not very common these days as banks make much of their profit on fees.
[addsig]
Quote:
(we put down $40K cash each)
Hey Joe,
Not alot of details on your deal, but it would seem to me by that line you overlooked something about the investment.
You stated 10% down which would equal 80G's of 800k... On a 4 unit? What could rent possibly be to generate cash flow & what is the ROI on that cash flow?[ Edited by agm on Date 11/19/2003 ]
We put down about $80,000 total, including loan fees. The building has been totally re-habed. New plumbing, electrical, water heaters, etc. The building's price was $660,000, and the monthly rents are currently bringing in $5,200 per month, or about $62,400 per year. We felt the numbers were pretty good for a 4 unit of this price, about 10.6 X gross rents. I know that is very high in some markets, but in So. Cal, that is what they are going for.
Don't forget about a 1031 exchange, if you and your partner are not worried about keeping the present property you could do a like kind 1031 and move up in property, not only that but your gain of any sort transfers, you wouldn't have to pay taxes on that gain for the time being. Keep doing 1031's until you have reached your goal.