Can Real Estate Investors (REI) Establish a HELOC Against Their Entire Portfolio

Can Real Estate Investors (REI) Establish a HELOC Against Their Entire Portfolio

Yes and no. Doing this is very difficult using the same strategy we teach in the program.

Why? The banks will give lines of credit where the investor has interest-only payments, but the banks don't want anyone to pay it off early which is why they have exorbitant prepayment penalties for investment properties of this nature. Of course, the HELOC(s) can be repaid up to 99.9% of the outstanding balance, but to pay it off in full is not a good idea due to the associated pre-payment fees.

Be aware that the lender is going to require reserves (i.e. 6-18 months) based on the size of the portfolio and the type of tenants. A long-term tenant with an extended lease will require little to no reserves, but it is always best practice to have 9 months of reserves (outside HELOC equity) no matter the type of property. A small family home may require little to no reserves, but an office complex, industrial building or hotel will require a lot more reserves since these properties are underwritten in different ways.

Banks lend for residential investment properties whether or not the property will actually be profitable, but commercial lending inverse of that! In commercial lending, the banks verify the property is profitable and then add a person as a guarantor for additional risk reduction. Analyzing any deal on the front end is extremely important, and thankfully it's not difficult: add, subtract, divide and multiply. The trade off is that it is a lot easier to get commercial properties and investments because there's no tax returns needed. But there is also the restrictions of - you can't re-access that money without another loan. Commercial bank lenders are the ones where a person will have success getting these types of lines of credit across the portfolio.

Most real estate investors have mortgage-based loans and they need to find a broker who can take these loans onto the Commercial Mortgage-Backed Securities (CMBS) market to move it off one's personal name. If the loan is large enough, the broker can attach a 'no-recourse clause' (i.e. one is not personally guaranteed) on the loan in which a holding company holds the title and the mortgage. This holding company cannot move properties in or out due to the securitization of the asset, but if one defaults on the loan there is no personal liability. Instead, the lender will simply sell the asset for the difference of what is owed.

By placing these properties into a holding entity (LLC, Corporation or Trust), it will not affect one's personal credit score or debt-to-income ratio. From a credit standpoint, offloading these properties will help a person qualify for more properties down the road. Fanny Mae and Freddie Mac loans require more reserves to be able secure the next loan - so it becomes harder as one scales up because more liquidity is required. So one becomes lendable once again by having these properties put together into a type of commercial product as opposed to having multiple mortgages or HELOCs on the personal credit report. When one has multiple loans that they are personally liable for, it takes a lot of time for a lending analyst to sort through all that liability. By showing them how another entity holds the loans and one does not personally guarantee the loans. But the income from the properties can get paid back the the person on a Form K-1 so more qualifying income is reported and can be leveraged to obtain additional properties!