Here’s a half GQ/half IMHO question for the financially savvy types among us. The scenario is this: I have a substantial amount of equity in my principal (and only!) residence, but not much in the way of liquid assets. What I’d like to explore is the idea of buying income-producing property, say an apartment building of 6-12 units. I’d use my home equity as collateral, in lieu of down payment. I assume this is commonly done, but what’s the usual mechanism? And what’s the largest amount you could finance through this method?
And then, most importantly, what are some hidden dangers of this (aside from a meltdown in the housing market, of course)?
The general rule is that you shouldn’t invest with borrowed money unless you have enough in liquid assets to pay the loan back at any time. Otherwise, if your investment doesn’t pan out, you’re left with a loan that you might have a little difficulty repaying.
I work for a real estate development company which is owned by two partners. Last year we borrowed about $100,000,000. While 95% of the population would consider the two partners “rich”, in no way could they pay off $100 million in loans if the projects went south. Investments are inherintly risky, that’s why you can make money. If you don’t want to risk your money; fine, put it in the bank.
To answer the OP; I think you’d have to get the money out of equity in some fashion. Whether that’s refinance or a home equity line of credit or something else is between you and your accountant. On a building that size, most banks will loan you 80% of the value over 15 years on commerical property. But in order to close, the seller is going to want that other 20% somehow! The banks decision will be based in large part on the current enforceable leases that the apartment building owner has. In other words, how much income is the property producing right now, and how much can you expect in the future.
I work in “retail” commercial as opposed to “residential” commercial, but I’ll be happy to answer any questions I can.
I hope you really are taking this one seriously. Maybe it just sounds like you’re dismissing it because it’s a given, but this kind of thing (to me) seems awfully risky, depending on the housing market you’re in. But that could be two things: a) I’m very conservative and 2) I live in an overpriced market that’s starting to tank.
I’m not real sure what this has to do with your plan. If anything it could be seen as a help. When home ownership goes down, renting (almost necessarily) goes up. I assumed you were talking about rental apartments in the OP. I only address this because scout1222 brought it up. If your thinking is that you won’t get as much equity because of the tanking, then you need to move quick.
Do you (the OP) have any experience operating rental properties? It’s definitely not the easiest business to be in, especially on the residential side, and it never has been. A lot of people who owned real estate before the current unprecedented credit boom and asset bubble simply got lucky. Don’t confuse this with actual market fundamentals.
In a manner of speaking. I currently have a couple of tenants in the three-family house I occupy. However, I recognize it’s a different kettle of fish when you’re dealing with buildings you don’t actually occupy. I take your point about market fundamentals, but it seems to be a decent time to buy, because the market is down. But even at that, I have a lot of equity in my house that I’d like to be able to exploit. My current line of thinking is that I’d like to buy someplace that does a little bit better than breakeven (I don’t need to live off these real-estate investments) with the idea being that whenever the market improves, I can cash out through condo conversion, or simply by selling up.
But now I’m wondering what the next step is – mortgage company? Some kind of independent advisor (accountant, real-estate lawyer)?
Going from renting a few rooms to an apartment building is a pretty big leap. I’d recommend at the very least that you consider smaller properties, like a small house or condo, and get some experience managing those before investing in an entire building.
If you’re going to use a management company to handle the renting and maintenance of the units I’d say that’s the next step. If you’re doing 3 yourself now I’ll bet you want somebody else to do 12! I’d “interview” 3 management companies - get them to tell you what they’d recommend renting the units for if any current residents move out, and how much they anticipate spending in maintenance, and how much they’re going to take out to do it for you. That will give you a better idea of the cash flow of the building as a whole. Then, if you have an accountant, the two of you can figure out if it makes sense. I’d say a lawyer would be the last part of the equation. Not that they’re less important, just that if it doesn’t make financial sense, then there’s no need to talk to a lawyer.