Cash Out Refi CRE Purchase

[Krishna Shah]

Hi everyone,

I'm new to this. I'm helping my father expand his RE portfolio. He's obviously more experienced since he already owns one CRE property.

I have some questions.

He wants to stick to Bank Financing over private lending. His primary mortgage was sold to a private lender in the early 2000s and he claims he had to give an explanation each time as to why he financed with a private lender with such poor reputation every time his credit was pulled. Despite having an 800+ credit score.

Purchase:

He says banks don't offer 30 year loans for CRE. If that's the case is the best hope a 10/15 year loan with 30 year amortization with balloon payment due? Want to put 40% down.

What requirements do banks look for?


How would they calculate DSCR? Based on Noi/Piti derived from the 30 year amortization? Or from the actual 10/15 year loan?

Cash out refinance:

Hoping to get 70% LTV from current strip mall commercial property. 1 unit owner occupied. 30 year term. Does this sound realistic?

Would doing a cash out refinance first to purchase next property hurt the process in anyway?

What would be some common pitfalls in either transaction?

Thanks everyone.

Cash out Refi property located in Northern NJ, and hypothetical purchase mixed use or multi family apartment building located in Brooklyn most likely

[Ronald Rohde]

What debt has he previously had on it?

None of this is useful without knowing the age/quality and ease of replacement tenant if it goes dark. Is the loan smaller than dad's net worth?

I say term of loan co-terminus to lease length if credit tenant. 20 year AM up to 70% LTV

[Krishna Shah]

He has a very small amount of principal left as the loan payments end in 4 years. I’d say less than 300k.

The building is in excellent shape with $500k worth of gut renovations done to 2 out of 3 units, and a full exterior renovation. 

The loan would be less than his nw yes. 

[Chris Mason]

"If that's the case is the best hope a 10/15 year loan with 30 year amortization with balloon payment due? Want to put 40% down."

I'd set expectations for 5-10 year maturity, 25-30 year amortization. 

"What requirements do banks look for?"

Experience is a big one, which he has, so good there. 10% post-close liquidity is a common requirement.

"How would they calculate DSCR? Based on Noi/Piti derived from the 30 year amortization? Or from the actual 10/15 year loan?"

Based on the proposed amortization, so the 25-30 years. NOI, yes.

"Hoping to get 70% LTV from current strip mall commercial property. 1 unit owner occupied. 30 year term."

It's only considered owner occ if that 1 unit is >50% of the gross leasable area. But, either way, yes that's realistic. Compare/contrast 65% v 70% LTV terms to see if that last 5% is really important to him.

"Would doing a cash out refinance first to purchase next property hurt the process in anyway?"

Nah, that's normal. 

Let me know if I can help; good luck!

[Krishna Shah]

Quote from @Chris Mason:

"If that's the case is the best hope a 10/15 year loan with 30 year amortization with balloon payment due? Want to put 40% down."

I'd set expectations for 5-10 year maturity, 25-30 year amortization. 

"What requirements do banks look for?"

Experience is a big one, which he has, so good there. 10% post-close liquidity is a common requirement.

"How would they calculate DSCR? Based on Noi/Piti derived from the 30 year amortization? Or from the actual 10/15 year loan?"

Based on the proposed amortization, so the 25-30 years. NOI, yes.

"Hoping to get 70% LTV from current strip mall commercial property. 1 unit owner occupied. 30 year term."

It's only considered owner occ if that 1 unit is >50% of the gross leasable area. But, either way, yes that's realistic. Compare/contrast 65% v 70% LTV terms to see if that last 5% is really important to him.

"Would doing a cash out refinance first to purchase next property hurt the process in anyway?"

Nah, that's normal. 

Let me know if I can help; good luck!

I hope they offer atleast 10. 5 would be a huge risk because even though the plan is to cash out refinance 2-4 years post closing date and extend the loan… 5 adds a huge amount of stress. But happy to hear it’s possibly 30 years amortization. 

His current loan is 10 years with 10 years amortization. He was always safe in regards to PITI but you never know. 

liquidity won’t be a problem. 

only brought up owner occupancy of 1 unit to see if it added any benefit for cash out refinance or caused any harm. I guess it’s a non factor. 

65%-70% really doesn’t matter as long as the $800k cash out happens with a new $1.1M loan. The appraisal isn’t in our hands. 

But thank you for your help, and encouraging words. 

[Simmy Ahluwalia]

@Krishna Shah - we should chat live. There are multiple programs out there, inclusive of 30-year term on CRE. Let's discuss options to best suit your father's scenario.

[Jared Rine]

@Krishna Shah..going to throw my $0.02 in here even though this was from a couple weeks ago.  I'd need to hear more details so just going to give some back of the napkin responses. There are lenders who can do 30 Year loans, but they are non-bank.  Most banks are going to write as @Chris Mason mentioned - 5-10 years/ 20-25 year ams in this market. 30 not so much, especially on retail. There are also banks that are staying away from office + retail even though retail sectors seem to be not hit as badly as everyone thought they would be. Some banks right now also don't like doing cash-out, especially at 70% LTV. As long as cash-flows are still good, cashing out to purchase another property should be a non-issue. His potential down payment of ~40% just depends on the numbers on the new purchase. PM if you want.

[Ameet Mehta]

Your father's preference for bank financing is understandable. While private lending can sometimes offer more flexibility, traditional bank financing often comes with better terms and rates for commercial real estate (CRE). But yes, 30-year fixed rate loans are uncommon for CRE so I wouldn't expect much there. And a common option is a loan with a 5 or 10-year term and a 25 or 30-year amortization, with a balloon payment due at the end of the term.

Banks usually look for a DSCR of at least 1.25. This means the property's NOI should be 1.25 times the debt service. I would consider a 70% LTV ratio realistic for a cash-out refinance, especially with strong financials and your father's excellent credit. That said, terms can vary by lender, but here a private lender can offer those favorable terms, so yeah, definitely weigh both the options, man.

Doing a cash-out refinance can provide the funds needed for the next purchase, but it can also affect your debt profile. Adding to the last point, ensure the new debt does not negatively impact your father's DSCR or other financial ratios in a way that might make it harder to secure the next loan.