Investor · Hudson Valley, NY · Member since 2020 · 4 posts · 3 votes
Hi BP community! I tried to find this answer in the forum but couldn’t get the information. Sorry if this is a stupid / redundant question. Here’s the scenario:
Bought 5,000 sq. ft warehouse for $260k in cash. warehouse was unoccupied and needed full rehab
Invested $80k in rehab improvements
Secured 3 tenants that will occupy 100% of the space with 5 year leases. All are small businesses doing wood working
Leases are rent + utilities
Rental income will be $4,000/month for all tenants. My only expenses will be Taxes and insurance @ $6k/year
So my question. I want to do a cash out refi and it’s only been a couple of months - how will the bank appraise the property? Will it be property purchase price + rehab investments? Will they include the rental income into the valuation? I’m trying to understand how the bank appraises commercial property, what factors are considered, and how can I maximize the value. For example, will they assign a larger value to longer term leases? Higher credit tenants? Length of ownership?
Investor · New York, NY · Member since 2008 · 187 posts · 36 votes
4y
Some items to note would be time of ownership, rent roll, type of leases, lender appetite. Some lenders may only lend 50% free and clear assets if they have no relationship with you. Some may not need an appraisal. They all will care about cash flow.
Specialist · NY · Member since 2016 · 82 posts · 60 votes
4y
Well, considering your property is leased, they would most likely utilize the Income Approach. With the Sales Comparison approach as additional support. They’re going to add a few more expenses and deduct a vacancy/credit loss in addition to your taxes and insurance. I’m assuming your tenants are on leases which run over one year.
So it might look something like this
$48,000 - Potential Gross Income
(-4,800) (10%) - vacancy and credit loss
$43,200 - effective gross income
(-$6,000 ) - taxes and insurance
(-$5,000) CAM/ repairs and maintenance / common utilities
(-$2,150 or 5% of egi) - management
(-$1,000) - misc/capital reserve/etc.
=$29,050 net operating income
$29,050 / 7% cap rate =$415,000
From there they will assign a loan-to-value. I’ll assume 65%.
So a total loan amount of $269,750.
The primary source of repayment is going to be the cash flow from the property. So they will formulate a mortgage payment. I’ll assume 4% interest, 5 year term/ 25 year amortization.
So I’d look a bit like this $29,050/$17,086= 1.70 debt service coverage. Which is very healthy.
Just note, all the inputs, cap rate, interest rates, etc. are assumptions. Theirs is just a quick back-of-the-envelope analysis of how the bank would look at it.