Refinancing After Addition of 5th Unit

[Adam Hicks]

Hi all,

We have purchased a 4plex in Louisville, KY on a 20 year note adjustable after 5 years.  We have a basement and I believe we can legally, and totally within our current zoning, add a 5th unit in the basement. 

My question is, assuming we can legally add the unit, what are the impacts to our current note and any opportunity to refinance? We used a local community bank that we had a previous relationship with for the purchase. My understanding is that 5 units becomes a commercial loan, so would we be refinancing into a 15 year note with a lower LTV? If that is the case, might we be better off just keeping our current note?

Thanks for the help in advance!

[Brian Stephens]

You are correct Adam. A 5 unit building would need to be financed with a commercial loan. The most common loan term for a commercial loan is a 5yr ARM with a 20yr amortization like you have now. One significant difference with commercial loans that investors who are new to commercial lending don't realize is that the LTV is typically based on the purchase price or appraised value, whichever is the lowest.  Typically, 3-5yrs after purchase, banks will take accept the appraised value if it is higher.  Do keep in mind that every bank is different when it comes to commercial lending.  You will have some very common practices but if you go to 10 banks for a commercial loan you will have 10 different sets of guidelines.  This is a hard concept for new investors to wrap their mind around because when you go to buy a primary home for yourself, every lender has the same guidelines and all you really have to shop for is rate and maybe closing costs.  Honestly, it is easier to understand commercial lending if you forget what it is like to buy a home and think of it as borrowing money from your friend to buy a car.  Your friend will come up with terms that they are most comfortable with and those terms may be flexible and they may not.  If you don't like their terms and they aren't flexible, ask another friend.