How Does Owning One Multifam Property Help You Purchase A 2nd One?
What I mean is, lets say you just bought a multifamily property last year that you still owe money on today, but can owning it help you purchase another one soon? I'm not that familiar with terms like "cash out refi". 

Overall what I'm a little confused about is how someone who owes money on a rental/investment property can still utilize something about that property like equity, to get them another loan for another rental/investment property?

Thanks!
[{"id": "fbxv73p", "text": "Assuming you\u2019re cash flowing, the additional income source helps for future borrowing. Also, your property is building equity. Depending on your tolerance and your banks tolerance, you can take a \u201chome equity line of credit\u201d out of your existing property to use to buy the new property. \n\nSo, your old multi-family, via monthly mortgage payments, is essentially building up a savings account that you can tap in to later.", "replies": [{"id": "fbxzyxp", "text": "oh interesting, so does that mean the property owner could technically buy additional properties nonstop without ever fully \"owning\" any of them? Wouldnt that cut into the profits though?", "replies": [{"id": "fby6o4h", "text": "I have lenders that lend on multifamilies based on STATED DSCR alone. 1:1 Good score, SIVA, 10-20% down", "replies": [], "depth": 3}, {"id": "fbyedri", "text": "I personally own a lot of property that for the most part i owe debt on (loan) which is ok with me. bc i still own the property. does it cut into profits? yes, of course it does. i have to pay a mortgage every month.\n\nso let's say a building brings in 10k a month from tenants.\n\nthe mortgage is 3K a month\n\nthe other expenses like the electricity, or the heat, or taxes, or paying the super, they all add up to another 3k a month. i still make 4k a month. right not bad?\n\nand once the mortgage is finished, by that time the building will bring in hopefully 15k a month, and my expenses will be like say 4k, so ill be making 11k a month. not bad right ?\n\nat the end of the day let's say i get tired and lazy and wanna move to palm beach and play golf all day and dont trust anyone to manage my properties, so i will sell the properties, pay off any mortgages and take the money and blow it on my wife's chanel bags.\n\ncapisce?", "replies": [{"id": "fbypnoz", "text": "ok but wait, lets start at the \"4k a month\" part of your example. Let's say you're getting that 4k a month, while you still owe the rest of the mortgage. How can you utilize that to get you your next property? That's the part I'm unclear about, is why a lender would be interested in giving you a loan despite seeing that you already owe a mortgage on another property?", "replies": [{"id": "fbys652", "text": "That $4k each month helps with your debt-to-income ratio which can be a factor banks use in deciding whether or not to make you that second loan. Also prior ownership of a multi family helps the banks know you have experience managing these types of properties so they look more favorably on you for owning other multi family buildings IF they have a good history of performance.", "replies": [], "depth": 5}, {"id": "fbyytnz", "text": "because if I have good history of paying the bank every month eventually when there's not too much debt left they'll be willing to give me $\n\nbanks are in the business of making money w minimal risk\n\nthink common sense", "replies": [], "depth": 5}, {"id": "fc6xfqw", "text": "My best suggestion for you is to live as cheaply as possible in your personal life, get debt free then operate without debt, drive a jalopy if that's all you can buy without a car loan.  Live in the cheapest possible place (that's not in crack town or something).  That way, you can bank all are most of the cash flow  from your first property to generate the equity needed for future properties.   \n\nThat's what my husband and I have done throughout our 28-year marriage. He was a commercial GC for many years and I worked in commercial real estate, though I stayed home with my kids for about 9 years. We built a relatively modest home when we got married, then another slightly larger home in the same neighborhood 20 years ago.  In the early and mid 2000s while our builder and developer friends were moving to bigger and bigger homes every other year, we lived well below our means, drove 5-10 (or older) year old cars we paid cash for and paid off our mortgage by 2005.  When the crash came, we were among the minority who did not go bankrupt and we were able to limp along on very minimal income until the mkt recovered.  After the crash, my husband decided to just focus on small, unsexy development projects he could manage with no permanent employees and avoid the risk and stress of GC work.\n\nI still buy all my clothes from thrift shops and bigger ticket items off craigslist, Facebook or eBay whenever possible, and am very content doing so.", "replies": [{"id": "fc83r8s", "text": "I live with my parents, have no personal or business debts, have no outstanding loans, already drive a 10 year old reliable car, and already live debt free. I've been happily using the same phone for the last 5 years and I've never bought an apple product. Not sure where you got the idea that I had debt, but intertesting story nonetheless.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "fbyfsk6", "text": "Yes it would eat into \u201cprofits\u201d for an individual property. But, it allows you to leverage debt to expand and diversify. Depending on what you do, you may be able to make more profit by creating additional cash flowing properties.", "replies": [{"id": "fbypg67", "text": "oh right but why would a lender even allow me to use my debt to basically create more debt? Like what benefit does the lender get out of that transaction? And how long would I have to wait after purchasing a property to use it to purchase another one?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fby003v", "text": "Couple of ways off the top of my head:\n\n\\- Yes you could refinance property #1 at a higher mortgage amount to get additional cash (this is the cash out part) to purchase the second property (make your down payment).\n\n\\- Cash flow after debt service from the first property can help pay the debt service of the mortgage on the second property. Less risk for the owner. \n\n\\- You could see if a bank would originate one loan over both properties. Bank may be willing to give lower interest rate given their additional security and diversified risk (geographical diversity, less reliance on each tenant to cover debt service, etc.).\n\nProbably lots of other stuff, too.", "replies": [{"id": "fbzxp5h", "text": "The loan comment is interesting. Didn\u2019t realise you could combine them", "replies": [], "depth": 2}], "depth": 1}, {"id": "fby2v0b", "text": "It doesnt always.\n\nBanks will lend you money based on your perceived ability to repay a loan. Your ability is primarily based on your income and assets.\n\nIf you have an income property you have two things going for you.  Equity (value of house minus value of the mortgage) and cash flow ($ per month coming in).\n\nThe bank will look at both these factors and in some cases determine they can give you a loan for a second income property if you have enough equity or cash flow.\n\nCouple notes.\n1) until you get bigger banks will want you to have at least 20% equity in your first property.\n2) banks will generally want you to have a 20 or 30% down payment for the second property. This could be financed with cash out refinancing of your first property so long as you keep 20 or 30% equity in the first property.\n3) even if your first property does cashflow banks still count the debt of the mortgage against your total debt to income ratio. Banks won't give you more tha. 40 it 50% debt to income ratio when starting off.\n\nSo to sum up, the easiest way to have your first property help pay your second property is to have massive appreciation of your first property by fixing up the place, and renting it for a lot more than you originally bought it for.\n\nCheck out biggerpockets.com to learn a whole lot more.", "replies": [], "depth": 1}, {"id": "fbye2ka", "text": "its really simple. \n\na bank wants to lend money right? because when they lend, they charge interest. this is how they make money. \n\nbut the bank doesn't like to take a huge risk. \n\nso they usually need something as collateral in case you decide to not pay them back a loan.\n\nif you own property ALREADY , the bank likes this. because you are lower risk to them. \n\nso they will give you a loan, and if you don't pay it back, they get to own your property. \n\nbut they're not in that business. they're in the business of making interest off the loan. \n\nSooooo really simple, the bank will likely give you more $ if you already own something worth $.\n\nwhat you wanna call it , or what they call it, can be confusing to people. but that is the basic gist.", "replies": [{"id": "fbypvi9", "text": "hmm that makes a lot sense. thanks! So, in general, how long would I have to wait before getting a 2nd property with a new mortgage? For example, if I get a mortgage for a property today, would I be able to utilize that instantly to get a new mortgage for a different property tomorrow? Or would it \"look better\" at least on paper, if I waited a year? Or is there an actual hard number of months I would have to wait before a bank would consider giving me a new mortgage?", "replies": [{"id": "fbyypnp", "text": "the bank wouldn't give you a loan until you've at least repaid a significant portion of the mortgage.  its not a time thing.  its a money thing\n\nif I lend you money and you give me your car as collateral and then you use that money to buy another car, why would I lend you more money. \n\nhas nothing to do with time", "replies": [{"id": "fbyzs3n", "text": "oh right good point. \nSo in reference to actual \"cash on hand\", whenever I'm ready to get the 2nd property, the amount of money I physically have would eventually not matter as much after owning the first property for a while, right? Because I would eventually be able to take value out of the first property to pay for the down payment to obtain the 2nd property right? or did I read that incorrectly", "replies": [{"id": "fbz2f9z", "text": "correct a mundo.   \n\nsmart investors never use their own $\n\nif they do they leverage their own cash w lenders. \n\nthere's always a risk w anything you do.  you want to lighten your outlay of cash\n\npersonally I like to include others in deals, and syndicate when possible.", "replies": [{"id": "fbz5fei", "text": "oh, yeah it would be nice to find like-minded individuals who happen to be in similar financial situations as mine, but i don't know any lol thanks for the great info tho!", "replies": [{"id": "fbz8au2", "text": "good luck\n\nits a long haul game.  think 20-30 yrs.  my plan is to retire early and leave my grandkids a sizable portfolio.  my only hope is they don't piss it away. \n\nI started out buying my first building when I was 25. my advice is just go for it and make it happen", "replies": [{"id": "fbz9bnn", "text": "good plan! although as someone who has had absolutely nothing handed to him from his poor parents, I personally would never leave anything to my children, in hopes that they don't turn out spoiled and never learn the value of hard work. A lot can be learned about yourself and your life when you don't know where your next meal is going to come from. \nBut that's just me. I've seen what \"having everything\" has done to my close relative's children. I have no children though, so perhaps i'm not qualified to even think that far ahead with any legitimacy lol.\nbut thanks for the info and I definitely will go for it.", "replies": [{"id": "fc01szn", "text": "I grew up poor and wouldn't want that on my kids. wait until you have kids", "replies": [{"id": "fc0cyze", "text": "It motivated you to a certain extent though, didn't it? To no longer remain that way, right? Maybe you're right still", "replies": [{"id": "fc0gvwv", "text": "definitely 100 percent", "replies": [], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "fc6wak1", "text": "It is a matter of \"time\" in that you must have sufficient equity in the first property, either from appreciation (which usually requires some passage of time) or paying down the loan.   I do disagree with the \"other people's money\" comments and the notion that your cash on hand is not a factor.\n\nIf you run around mortgaging all your properties to the hilt and generally maintain a high debt level with little cash on hand, you are asking for disaster in the commercial real estate world.  Things happen, buildings get damaged, air conditioners or other expensive components wear out or break and need replacement, tenants move out or go broke etc.  Maintaining larger buildings is expensive and you put yourself in a very dangerous position if cash poor, your options become very limited when Murphy's Law is in effect.  \n\nMost commercial mortgages are not like home mortgages that you can set and forget for 30 years.  Commercial mortgages typically \"reset\" or renew every 5 years or some such time frame. That means the property and any loan guarantors are essentially re-qualified by the bank and the loan can be \"called\" if the property or a guarantor is not up to snuff.   If you can't then get another lender to make a loan, you will likely lose your property.\n\nMy husband and I consider ourselves mom and pop bootstrap developers. We'd rather have one or two properties with growing equity and good cash flow vs  a large portfolio mortgage to the hilt that we could lose in an economic downturn.", "replies": [{"id": "fc6xaut", "text": "interesting but wait, can you elaborate a bit more on the \"resetting\" part of commercial mortgages? You referenced something about getting \"called\", what does called mean? Is that like a 2nd Interview or something to see if the property as appreciated since the mortgage origination or something? Is this industry standard? So even if the property is cashflowing positively and I've never missed a payment on the mortgage, the bank could just take the property back if it hasn't appreciated in value over the past 5 years?", "replies": [{"id": "fc754hr", "text": "I haven't dealt with a huge number of commercial mortgages but my experience is that very few commercial properties get long-term (15-30 yrs), fixed rate mortgages.  The mortgages I've seen have a fixed rate for 5 years, with the payment amortized as though it's a 20 or 25 year loan.  \n\nAt the end of 5 years, the lender can then review the property, the borrower (i.e. if you've accumulated a bunch more debt and are living hand to mouth that's not a plus) and tenants (if applicable).  If the value of the property has dropped, you've lost tenants etc the lender may decide not to extend the loan and it is \"called\" - you must either pay off the mortgage in full or find another lender or the lender can foreclose.  It's basically a balloon mortgage.\n\nI've seen many mortgages have a renewal rate set as x% over prime or whatever; if you and the property are still a good risk and current rates are below that amount, the bank might offer a lower rate to avoid you refinancing with a different lender.  \n\nI'm sure that these terms can vary depending on many factors, I invite people on this sub more experienced with commercial mortgages than I am to provide their comments. Basically, my point was that commercial mortgages carry more risk for the borrower and are more complicated than a residential mortgage.  Speaking of residential mortgages, a commercial lender may require a lien on your personal residence to provide a commercial real estate loan.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fcodcci", "text": "Agree with most of the comments. Couple other thoughts:\n\n-to the extent you\u2019re existing MF has appreciated, Refinancing can enable you to earn out equity and apply that to a new down payment on a 2nd asset to expand your empire. This is how most multigenerational RE owners run their properties: own, hold, refi, earn out some cash, reinvest and expand. It allows for capital distributions but not at the expense of selling your valuable, cash flow generating asset, all while continuing to appreciate while you can write off the interest tax deduction. Best of both worlds. \n-cash flow post debt service can be applied to carry your operating shortfalls/tax carry at a newly acquired property that you may be doing renovations on or leasing up, materially de risking your new pursuit and allowing you to pursue upside on stabilizing a new property. \n-you can cross collateralize your loan, meaning you place two MF assets (or more) under a type of portfolio loan which most borrowers don\u2019t like but some lenders prefer. You can get better interest rate, covenants etc etc but if there is a default at one both properties are on the hook for  curing the default or paying off the loan \n-sponsorship/guarantor enhancement: even if you don\u2019t cross your loans, owning one MF will improve your balance sheet (shows higher NOI and debt serving capability, balance sheet equity if you\u2019ve amortized down your loan substantially, and MF operating experience) all things lenders value in a guarantor whose ultimately on the hook as \u201cbackstops\u201d for recourse (repayment guarantees) if the bank requires that and you default. If you\u2019re a better credit you get better overall terms.", "replies": [{"id": "fcoo6ew", "text": "Interesting stuff and 2 points I'm hope you can elaborate on:\n\n\n*Refi: I keep hearing about that strategy of \"own, hold, refi,reinvest\", but I don't fully understand it, can you explain why a Lender would be ok with \"giving back\" money? And are you referring to \"cash out refinancing\" or a different type of refi?\n\n*Tax Deduction: Can you explain what is able to be deducted?\n\nThanks!", "replies": [], "depth": 2}], "depth": 1}, {"id": "fcryemt", "text": "Refi: by way of example, assume you buy an asset for $100. You capitalize your buy with 80% debt and 20% equity. Then assume in a year from now, your property is now worth $150. You can either sell your property, payoff your loan of $80 and make a profit of $70. Alternatively, you can do a refinance. A cash out refinance is whereby you \u201cearn out money\u201d, i e get a lump cash distribution  by going to another lender, having them lend you 80% on your new market value (so $120 loan), and pay off your old loan of $80. this mechanism \u201ccashed out\u201d $40 as you earn a distribution from retiring your old loan balance with a new balance that\u2019s much larger. The bank funds this directly to you so it\u2019s essentially cash in your account. You can distribute it to yourself personally, or reinvest in the property (or others). The cash out component purely references when you refinance at a higher loan balance than your existing loan and get a distribution of cash since you have $ left over from paying off your $80 loan. A refinance in general just refers to placing new debt on your property (when you initially buy a building that\u2019s called an initial financing - refi implies it\u2019s a second generation loan retiring an old loan) which may still make sense depending on your goals even if there is a minimal or 0  \u201ccash out\u201d (lower interest rate, extend loan term, better lender relationship, favorable amortization, floating rate vs fixed). \n\nTax: interest on mortgages is tax deductible. All this means is that when you pay your taxes, your taxable income is netted down by the interest you pay on loans, reducing tax basis. Depreciation is even more powerful tool and is one of the most unique and advantageous parts of owning real estate. It\u2019s the only asset type where even while your property appreciates in value over time, you are able to \u201cwrite off\u201d or depreciate an amortized value of the building over time as a tax benefit. Unlike interest deduction (that you actually pay) This is a non-cash expense. There is no actual expense to you. There is no bill in the mail for depreciation. It all has to do with accounting land. Simply for tax purposes you can reduce your taxable income further by 1/20th the amount you bought that building for (in the example where you bought it for $100, you can reduce your taxable income by $5/year). This is an enormous advantage that offsets taxable income across all your personal taxes. Note that this is high level, the interest/depreciation/accounting codes change overtime so I am not sure on the exact formulas but this should provide basic insight into the topic and lay out the pros and cons for you.", "replies": [{"id": "fcs0712", "text": "wow great info thanks so much!", "replies": [], "depth": 2}], "depth": 1}]