How much to borrow when appraisal comes high?

[David Fernandez]

Hi!

When you are refinancing a property and the appraisal value comes back way higher than your purchase+repair costs; how much will you borrow? The max the bank gives you to continue growing your portfolio? A prudent amount to make sure your property never goes under water if there is market crash? A loan amount with a debt service that allows your property to cash flow nicely? Other?

This is a decision I need to make very soon. I'll try to summarize it as much as I can to not bore you with the details. Here it goes:

- We bought two adjacent MF buildings (13 units total) in Bolton Hill, Baltimore this past August for $725k. We thought it was an incredible deal, even though we had to do work in the units that were dated. 

- We purchased it cash, since we could not find the financing necessary to close by the agreed closed date. We needed some money from a few investors to help us with the gap between our capital and the purchase price.

- We have increased the rent income from $6,600 to $11,300 in 4 months by filling 4 vacant units (2 of them were down) and increasing rents to almost market level to the tenants we would like to keep. We expect to have a rental income of $14,000 by the end of 2018 (see next point), plus some other income from parking, Internet, and storage spaces.

- We have also decreased the expenses by $600/month passing the utilities to the tenants and improving management.

- We have put a total of $24k in the building so far, including the total rehab of the two units that were down. We plan to turnover and upgrade the rest of the units within the next 12 months.

Since the day we bough the property, I started working with local banks to refinance the property until we found the one we liked. The appraisal came back today. The "As Is" value is $1,460,000 and the "As Stabilized" value is $1,770,000. This confirmed that we got a good deal!

This are the terms of the loan:

- 5.5% fixed for 5 years, 7 year maturity, 25 year amortization (not great, but the bank is extremely investor friendly and has great products that will help us grow our portfolio faster). Prepayment penalty before year 3.

- The bank is willing to lend up 70% of the "As Stabilized Value". They put a cap of $900,000, but may be willing to lift it since the LTV now is ~50%.

Our main goal is to keep growing our portfolio (looking for a 20-50 unit building now). At the same time, all of our assets must cash flow. So, how much will you borrow in our situation??