There was a post this week on a real estate forum I follow. It is an investor who owns 4 investment properties free and clear (no mortgage) and wants to scale into larger multifamily deals but has no cash; all of their capital is locked into properties they have rented out. A link to the original post is on BiggerPockets, a social media platform for real estate investors. If you haven't done so already, check it out, create a profile and subscribe to their podcasts. There's a wealth of free information on there. The link to the post is here:
"Bryce, I've been in your shoes. The challenge of the typical real estate investor is that you are always running out of money. Asset rich, but cash poor to grow your real estate business.
A couple of options for you here:
1.) You can cash out refinance and hold the cash out proceeds on your books until you find a larger deal you want to purchase. Yes, you are paying interest on utilized cash but it's good to have dry powder when you're ready to pull the trigger on something. If you don't do this... I always say "opportunity never comes at a convenient time." I guarantee you, when you find your perfect larger multifamily or commercial deal, you are going to be scrambling to refinance your three properties, and the opportunity will slip through your fingers.
2.) Find a deal with a seller who will allow you to put their property under contract contingent upon you selling your property or properties and doing a 1031 Exchange. Problem with this, is that not all sellers will be comfortable with this type of contingency or a contingency like this will render you uncompetitive.
3.) Do a cash out refi with a hard money lender, and use the cash out proceeds as a down payment on your larger deal. This would enable you the flexibility of getting your down payment money quickly but cost you in terms of higher interest rates. Most hard money lenders will charge between 8-16% interest effectively; much higher than the banks. Then refinance the hard money mortgage with conventional permanent financing with a bank. Or if the larger deal you are buying has enough meat on the bone from a value add standpoint, you can force the apprecation by stabilizing expenses, pushing rents after performing improvements, and then refinance your new deal and pay off the hard money loans on your condos. This scenario would require you to walk the knife a bit and add a lot of moving parts or variables which you might not be comfortable with.
4.) Raise the downpayment money for your larger deal from people who have cash. In one of our recent blog posts (which is here), we covered that in this low interest environment there is a big problem out there. People with cash don't know what to do with it in order to earn a higher return without taking unnecessary risk. We partner with these types of investors and pay them 8% on their money, which is much higher than their bank or bonds or any other safer fixed income instrument out there. We use this capital to purchase and improve property and then pay them back once we've executed our value add strategy for the property. Once we've significantly improved the property's net operating income (NOI), we take it back to our bank and they give us a higher loan amount which allows us to pay our investors back. (If you, the reader, are interested in learning more about our opportunities, get on our OakGrove Capital distribution list HERE)
If I were you, I would go with option 1. With rates as low as they are right now, you are essentially shorting the dollar. If you needed a place for the cash for a year or so, perhaps you could be a hard money lender yourself and make some money on the spread until you are ready to purchase something larger.
I hope this helps! Congrats on being a stay at home parent. Being a good and present family person was my top reason for earning my financial freedom. I was able to accomplish that by scaling into larger deals.