Any differences with a BRRRR deal when it's a commercial Multi?

Question

hey there. I have a 4-plex under contract in Sacramento and my plan is to do another BRRRR deal on this one however the value add will actually be adding more units. There's wasted space in the back of the building and the zoning allows for more units to be added.

My question is, since I am starting out with a 4-plex which is residential, and ending up with a 5 or 6-plex which is commercial, are there any differences I should know about the refi process before going into this deal?

Will banks still lend 70% of the ARV?

I assume the interest rate will be much higher on the refi loan right since it will be commercial?

Will I have to deal with a balloon payment?

Any and other things I'm not thinking of??

thanks all!

Chris Lopez · Answer

@Nicholas Lohr I spent 3 months working with a commercial brokerage that specialized in 15-100 unit apartment buildings in SoCal. Getting into 5+ is a totally different world. I was a sponge and learned a fair amount. Talk with different banks before getting loans. For a good part of the year, Chase was the best lender for apartment buildings in SoCal. But right around the end of Q3, they really tightened up the loans they were making because they hit their internal benchmark for how much of their portfolio they wanted in SoCal apartments.How much did you put down for the 4 plex? The deals I saw had investors putting down 25-40% for purchase or refi. It was a lot more than residential loans.It's all about the numbers too! The way to increase value was to increase rents and minimize expenses. That's all anyone cared about.

Andrew Johnson · Answer

@Nicholas Lohr Apologies for the confusion, I mean "get" as in obtain the money through refinancing to another 5-7 year fixed-rate balloon mortgage. You don't have to obtain the funds to payoff the balloon from another (different) funding source. Many community/regional/local banks will just keep refinancing those commercial loans every 5-7 years and adjusting the interest rate at that point. The risk is that you go from a 30-year fixed-rate loan today with a 30 year amortization today (as a 4-unit) and trade that for a 5-year fixed-rate loan that will reset the interest rate to the market level when you refinance.If the rate is 6.5% then (I'm just making up a number) you now have an interest rate that has gone up 1.5% and you're on a 20-year rather than a 30-year amortization table. That said, guessing future interest rates isn't exactly simple.And, to shorten my answer, yes they will lend at 75% LTV. However, if you want to use the income of the property to help your DTI ratio to qualify, that could present some hiccups. Some banks will require that a property be professionally managed and show two trailing years of financials, some 12 months, some will allow you to use only a percentage of the income if you're doing a quick refinance. Once you get into community/local/regional banks you hit loan committees that can have different requirements. And it doesn't mean that every bank will be the right bank to lend on your property. They aren't reselling the mortgage so it has to make sense for their risk tolerance, loan portfolio, etc.

Nicholas Lohr · Answer

Account Closed thanks for the response. I'm not too worried about cash flow on this deal because the it cash flows straight out of the gate even without me adding the new units. My biggest question is, do banks still lend 70% of the ARV when it's a commercial multi-family as they do when it's residential? I suppose I should just call some banks and ask, I'll do that. I'm a bit confused by what you wrote here, "You can "get" the balloon by refinancing but if the market takes a little dip and which changes your DTE ratio, what's your plan? I'm guessing you'll get a 20 year amortization"Is there any way you can explain when you mean here? My confusion is the "get" in quotes.? Also are you saying that I'll start with a 5-7 year with a balloon and then refi into a longer term when it's time?

Account Closed · Answer

I think it depends. I would contact Golden 1 credit union here and see what type of financing they would offer. Especially since you're clearly doing big things in the area.

Andrew Johnson · Answer

@Nicholas Lohr You'd really want to dive into the terms of the commercial loan. And it will behoove you to shop around at a few regional/community/local banks. The loan will likely be full-recourse. You'll probably have a 5-7 year fixed-rate with a balloon at the end. You can "get" the balloon by refinancing but if the market takes a little dip and which changes your DTE ratio, what's your plan? I'm guessing you'll get a 20 year amortization (maybe 25) which will significantly changes your mortgage payment (read: cash-flow). The good news is that heftier payment helps to pay down the principal quicker so you're less likely to end up in DTE issues at the end of the 5 or 7 year term. Just for simple math:$840K loan @ 5% w/ 30 year amor = $4,509/month$840K loan @ 5% w/ 20 year amor = $5,544/monthThat's a $1K/month swing based on just adjusting the amortization timeline. How does that impact your cash-flow?

April Crossley · Answer

Definitely check with your local bank that you do cash out re-fi with. They may lend a smaller percentage on commercial-- they may not. And depending on the value once it's all fixed up you may actually get better terms. Not sure where you are and/or how pricey things are there but where I am if I'm buying 500k+ my terms are more favorable

April Crossley · Answer

@Nicholas Lohr let me know what you find out when you meet with your small local community bank :) Curious as to what they will do for ya!

Nicholas Lohr · Answer

@April Crossley thanks for the input. Yeah this will be a purchase price of 875k and an ARV of 1.2 million. At least that's what I'm seeing as far as comps out there for downtown Sacramento 6-plexes. I think my biggest question is will the bank lend 840,000 against the new 6-plex. (1,200,000 * 70%) so I can pay off the old loan and get the majority of my value add capital back.