Hey everybody, long time lurker, first time poster here. Thanks for everything you all do; this community has been my go-to for years now and I'm excited to finally start a discussion of my own here.
Let me set the scene. My family has invested in single-family rental real estate for ~15 years now, and we have very consistent returns at small scale (current portfolio is less than 10 units). These units are in a small community (~500 units), with a Home Owners Association, a community pool, ~50/50 renter/owner split, the whole deal. We use a Home Equity Line of Credit on our primary residency to fund the acquisitions, at an ~5.0% interest rate. Cap rates for the units are ~7.5%, so illustratively:
100% Equity: NOI: 7,500 Equity: 100,000 CoC: 7.5%
80% Debt @ 5%, 20% Equity NOI (less interest expense): 3,500 Equity: 20,000 CoC: 17.5%.
We've decided to get serious and use the cash flow strictly to fund acquisitions, along with injecting some capital from other income sources. Issue is, this HELOC will only go so far to maintain a reasonably high debt/equity ratio, which juices the returns so much. The lowest I see lenders offering for investment properties is ~8-9%, which reduces the CoC return given that rate is higher than the cap rate.
Some units can get beyond that 7.5% cap rate through upgrades, but not by much. The cost of debt is so high, it essentially makes this a non-factor. For that reason, I don't see how this scales. Anybody have any ideas on how to fund this to get to mid-double digit returns? The dream is to figure the cap structure out, contribute a small % of the equity and syndicate the rest to LP's at ~12-14% IRRs in this community, and then repeat in Tier 3 communities across the country. Any comments on the broader idea are welcome as well.
TLDR; $25MM worth of single-family homes with impeccable rental histories available for sale at 7.5% cap rates. How would you build a realistic capital structure to get at least a 15% CoC return (assuming there is only 1 level of equity holders)? If not enough info, ask away!
Appreciate all of the details and context here, makes it much easier to weigh in.
I'm assuming this is the case but wanted to confirm, I'm assuming that home equity line of credit you've been implementing is limited to the asset level? What is the constraint and maximum proceeds you can pull at any given time?
From the outside looking in and given the nature of your product/experience (while also admittedly knowing nothing about your personal balance sheet and ability to borrow), it feels like that as long as your portfolio and future acquisitions are in the same regional area you should be able to get more efficient financing vehicles.
Although the banks are (still) conservative with new construction, if you have a big umbrella entity that owns shares of the separate LLCs you should be able to form a programmatic relationship with a lender for a bigger line of credit which would open this up for you more and help your returns.
That's coming from the developer perspective however so I'll let the mortgage brokers for this asset class weigh in as they have better intel than me.