Your not really missing anything. What you do want to keep in mind however is that the money you pull out does have a cost, it’s not free and it’s likely that you will eventually pay tax on it some day since your basis doesn’t change. And there has to be some closing costs to be considered.
While having equity sitting untapped seems like a bad deal so is having converted it to cash with no investment to put it into.
When I pull cash out it already has an investment to go into and I look to reduce my debt service in the process.
In your first post you suggested just that putting it into another investment. There are other ways to that without pulling out the cash. Creating a working line of credit against it is one way. Pledging some equity as colateral is another.
The WLOC I’m working on right now is at prime +1 put since its only designed for 12 months it wouldn’t make much difference even if it were higher. It’s not intended to be permanent financing.
The most important thing though is that you have to keep the money working for you… having it sitting in an account is not having it work for you.
Last year I purchased a culdesac of 14 duplexes (28 units) for $1.4M with no money down. The seller carried a 50% 2nd note on the complex, making getting a first note at a bank very easy. I was able to pull $100K out for capital improvements at closing. I am currently refinancing the project and the appraisal has come back at $2.3M. I am getting a 30 year fixed loan at 6%. Based on the appraised value, I can pull up to $350K out of the property, which would only raise my monthly payments by $1,000. My properties will definitely still cash flow with no problems. I can then leverage the $350K to buy up to another $2.0M of real estate. Don’t want to go to far, too fast. Any thoughts from professionals on getting over leveraged? Thanks!
Re: Cashing Out on Refinance - Posted by Ed Garcia
Posted by Ed Garcia on April 30, 2003 at 11:04:04:
Mark,
Congratulations, no question you hit a “Home Run”.
As for your statement “Don’t want to go to far, too fast”. I’ve got to tell you that the deal you’ve just done, don’t come along every day. This business is what have you done for me lately.
The problem when doing a deal like that is that is spoils you and is tuff to duplicate.
Mark, if you get another deal like the last one, please, please call me partner. (smile).
Gracious. That’s a lot of bread to be throwing around. This is my first venture to this side of the board. I have hung out at the mobile home board and recently had the chance to speak to Ed Garcia over the phone. I am seriously considering attending his seminar in Atlanta. Anyone here (or perhaps EVERYONE here) have any experience attending his weekend seminar? Was it worth the time, effort and money?
Phil Pelletier
PS- To think I was happy with paying $300 for a mobile home and selling it for $5900 before my check even cleared. “How will we keep them down on the farm, once they have seen gay Pair’ee!”
Thanks Ed…I will let you know when I find my next deal and need a partner.
Do you have any guidelines you teach on leveraging? Leveraging works great as long as things are going the right direction, but can be devestating if the market turns. Would be interested in your thoughts.
Re: Response to Lenders Workshop… - Posted by Ed Garcia
Posted by Ed Garcia on April 30, 2003 at 11:08:26:
Hi Phil,
It appears that you’re busy today. I’ve received you private e-mail and now I see that you’re on the board. As for the Lenders Workshop,
if you look down the board, you’ll find a post made by Bill Taylor titled “Lenders Workshop”. There was a replay by another student of
mine named Zack Weist. If you would like some references I’ve got tons of them.
Better yet, if you come to the workshop, you’ll meet some Alumni (previous students) face to face. Jim Rayner will be there. He’ll tell you
how he has made 3 mil since attending the workshop. Charles will be there, he’ll tell you how he has acquired $1000,000 in Working
Credit Lines. Zac Wiest, Robert Mc Bride, Joe Hartpence are a few more alumni that I can think of off the top of my head that will be
attending.
These folks are not coming just to see Terry and Myself, but because they know that this workshop flows with energy. They love RE
investing and want to be in an environment that is conducive to what they do.
As I told you on the phone Phil, Terry and I are honored that these people come. Even though they do not have to pay to attend the
workshop a second time because they are alumni, they still have to pay for their Airplane flight, Food, and Hotel.
No matter what you decide Phil, thanks for showing an interest in the Lenders Workshop and feel free hang around the forum. I’m sure
that you’ll learn a lot, I know that I have.
A prudent investor makes their money on the buy and makes sure that the investment has positive cash flow.
In the event the market turns, the cash flow will help the investor weather the storm.
Another, piece of advice or prudent buyers philosophy, is that each investment stands on its own accord.
So when leveraging, it has to be done with a game plan. If not, then before you know it, you will have pyramided your credit, and leveraged to the point where it will have a dominos effect.
If I were to refinance your property, I wouldn’t borrow the extra cash. Instead I would just do a loan to lower the rate and have a payment reduction. That would be a conservative move that would be in the best interest of my investment. I then would get a credit line, which I would only have to make payment on in the event I used it. I would in tern only use it, if the right investment came along and I would have the money in it short term.
I appreiciate the dialogue you are providing on this. I tend to agree with your approach, but let me ask you a few things about my situation. My current payments are $10,050 a month on a $1.5M note. By refinancing, I am able to secure $280K in cash, which will raise my monthly payments to $10,672, or a monthly increase of $618. Now if you do the math on that, I am borrowing $280,000 for only $618 a month. Based on a 360 month amort, the interest percentage I am actually paying is a NEGATIVE percent!! Since I am buying distressed properties where I need immediate access to cash, I don’t see the downside to pulling out cash. I am recognizing some of the capital in my asset, without having to sell my asset. I am not having to pay capital gains on the money, and lastly I am paying much lower interest on this money than using a standard line of credit at the bank. Doing all of this while keeping my cash flow well within check. Frankly, if I raise my rents by $20 a door, I am back to neutral, except I have almost $300K in the bank thats basically free money.
First of all I wouldn’t do a negative amortized loan on the units unless I intended to sell them in the immediate future. You gave me the impression that you intended to keep them.
Now that explains why there is only a difference of $618 for the additional $280,000. When comparing your financing, you’re not comparing apples to apples.
You’re pretty sharp guy Mark, but I think you’re selling you’re self on what you want to do rather then structuring the deal in the best interest of the subject property. As I said, each investment must stand on it’s own accord. Yes, if a hot deal comes along and you were to safely temporarily leverage property “A” to purchase property “B” short term with an exit strategy or game plan, no problem.
If not, you’re going to venture into pyramiding your credit, and over leveraging into a dominos position before you know it.
