Cashing out and refinancing

General Real Estate Investing
1

hey guys…im trying to plan ahead and get all my ducks in a row ahead of time. the strategy is to obtain seller financed apartment buildings (40+ units) and cash them out when refinancing.

i would like to start my search now in lining up banks that will do the refi.

a few questions that come to mind:

  1. how long will the property have to be performing (typically) before a bank will refinance? I read 6-8 months.
  2. what types of lenders/banks should i seek out that will finance these type of transactions?
  3. when screening the lenders/banks, what types of questions should i ask?

thanks in advance!

2

Hi,

 Apartment properties are sold based on income and expense which defines cap rate.

Now since all lenders look for a vacancy factor income will be adjusted according to market vacancy rates, for purposes of our conversation let’s say 10%. So if a 40 unit property is fully rented / leased for say an average $40k dollars per month, then effective gross rents are $36k.

Now investors and lenders expect to see financial projections based on the 50 / 50 rule that basically say’s the adjusted gross income is divided in equal parts to provide funds for operating cost’s and reserves, and for debt service and positive cash flow.

So let’s figure what ever purchase price is, we will use our example above of 40 units creating a net operating income (NOI) of $18k per month or $216k per year, so NOI / $216K divided by price (Let’s say for example) $2.2m = 9.8 cap rate.

So to refinance an apartment property at 75% LTV the effective gross rental / lease rates must increase by at least 37.5% to allow adjustment by a 10% vacancy rate to create an effective NOI of $24,750 per month or $297k per year to support a new gross property value of $3m to refinance $2.2m.

So you can refinance a 40 unit property worth $2.2 million as fast as you can increase rents by 37.5% and value to $3m! This is 7 years at a 5.3% rent increase per year!

Or you could buy the property in such disrepair, with distress, low occupancy and needing new management and increase occupancy, you probable need to find something at 50% occupancy or less so to increase occupancy and NOI based on income.
Turning around a distressed property could take 12 to 18 months or more and a lender probable wants to see stabilization for 6 months prior to refinance.

But in a distressed property expect to take money out of pocket for repairs, deferred maintenance and to cover direct cost’s and expenses! You may also have to do some kind of clean up, carpet and paint?

A commercial broker is best as they can shop the loan to multiple lenders for best rates and terms.

Can you refinance my commercial property?

                    GR
3

Howdy GR :slight_smile:

did you figure out 75% because that’s today’s standard for max refinance or because that’s a safe hedge against over leveraging yourself?

4

Hi,

Because 75% is the maximum LTV for a refinance loan.


      GR
5

after calling a dozen banks i just found that out :slight_smile: