How Long till I ReFi my 8 unit Building

Question

Hey folks,

Want to get you opinion.  I bought an 8 unit building last year.  Besides having to renovate and get all new tenants, I did a bunch of work with a new heating system (all new individual units) so the tenants now pay their own heating bills.  I got the building for $150k...it appraised last year at $230k..I owe about $100k.

I had to put the furnace project on my credit cards--a lot of money.  Fortunately, I have 0% interest on my credit cards til June 2015.

I showed a big loss on my taxes because of all the work I did in 2013.   The building is now filled and for the past few months I have been at full cash flow with minimal expenses!!!

Now for my question.  I really want to get the furnace cost off my credit cards.  When would I be able to refinance?  I don't know how banks think or what they are looking for.  Do I go back to the same back or choose a different one?  What do I need to show the bank so the big loss from last year doesn't make them turn me down?  I would like to be able to do this without killing my credit.

Honest opinions please.

Thanks,

Alexis

Jean Bolger · Answer

Hi Alexis! I will soon be in a similar situation, trying to refinance a turnaround multifamily property. And, it's my first time doing this. Here is what I'm planning to do: Make up a presentation folder that shows the financials and condition when you bought the place and the current, improved financials and conditions, emphasizing all of the capital improvements and increased occupancy and gross rents. A commercial lender should be willing to loan on the ongoing income from the property. They'll probably see the fact that you spent all that money last year as a plus, not a minus, because it increases the value of the property going forward.

A big factor for commercial lenders is the Debt Service Ratio, or DSR. This is the ratio between the Net Operating Income (gross rents minus expenses) and the amount of your debt service (loan) payment. If your property is bring in $1200/mo NOI and your debt payment is $1200 the that's a DSR of 1.0. That sucks (obviously!) and you wont get a loan. If you're bringing in $2400/mo after expenses and your payment is $1200 then your DSR is 2.0, which is more than enough to make most lenders happy happy happy. A DSR of 1.2 is probably the minimum that a lender would accept. If you keep the amount of your loan under 70% of the appraised value and can show a decent DSR then you should have no trouble getting your refi. You may have to talk to a few different lenders, though. Good luck!

Account Closed · Answer

Alexis,

A lot of good opinions above.  Please allow me to add a couple more points.

1) the first thing I would do is talk to the loan officer at the bank where you took out the loan, and ask him to run your scenario by the underwriter and see what the underwriter is looking for. With this information, you will know what to do and how to prepare for it.

2) if necessary or required by your lender, let the property seasoned until you have completed your 2014 tax returns. Then apply for a cash-out refinance.

3) Commercial loans typically have a pre-payment penalty. Ask your lender about it now.  Also, ask them if they would waive or reduce the pre-payment penalty if you refinance with them.

Good luck.

Shaun Weekes · Answer

Hello Alexis,

Depending on how much of a loss you're showing you might want to do two things.  First I would for sure see if you qualify for another commercial loan and going to the same bank that financed you before is a great idea.

If you don't qualify you can amend your taxes now and then re apply in a couple of months.  This might cost you in the form of paying taxes now but in the long run it will help.

The second option is you can just wait for the new tax year and adjust your taxes so that you do qualify and get it done before June 2015 so that you don't incure additional interest.

If you're self employed you can actually file quarterly and show positive amounts for the first two quarters of this year.

Make sure you're using a good CPA because this tax thing gets crazy and even though it's good to show a loss and save on taxes it hurts when you need to refinance.

I would show income if you plan on getting more units so that you won't have a problem qualifying in the future.

I hope this helps and have a good one :)

Bill B. · Answer

Hi,

First, I do not own any rentals.

Why would you want to replace zero percent interest with anything higher?  Immediately after refinancing, you'll be paying interest on the entire amount loaned.  I'm no CPA, but the payments should still be deductible as a business expense, even if you are paying zero interest.

So, I'd pay the maximum you can against the debt as it is with zero interest.  Then, about April or May of 2015, I'd look to pay off the remaining balance by getting a loan.

This minimizes interest expense and maximizes the pay down with 100% of the payments through May 2015 reducing principle.  This also minimizes the interest that you pay over all on the debt.

Also, this gives you another full year of seasoning on the property.  That should help when the time to get a loan to cover the remaining balance on your credit cards.  (If there is any balance left.)

I hope this is helpful.

Bill

Curtis Bidwell · Answer

What you are calling "losses" are actually "Capital Improvements" and are not counted against your income/expense, they increase the cost basis on your property (obviously they affect your cash flow and cash reserves).  Your tax professional should have advised you accordingly (or I'd be looking for a new one!).

Henry M. · Answer

Alexis,

I may not be the best one to answer this but considering you have posted more than once, I would hate for you to think no one is interested in answering your questions.

Before I attempt to give you my mediocre advice... Let me ask a few questions.

Are you working full time elsewhere? If so, for how long?

This is important as any bank will only count so much of the rental income affecting your debt to income ratio.

Also, are all these tenants in long term leases (i.e. year)? This is also important.

Do you have any other assets to offset the debt in general?

Are you truly only wanting to refinance due to the furnace on your credit cards or are you trying refinance the terms on your note or are you trying to pull additional cash out?

If it's just the furnace, how much is the amount? Why is it so important to pay that off immediately? Is it because the 0% interest is on a limited time frame with an expiration date slowly arriving? There are also other credit cards which will allow you to transfer amounts at a 0% interest to earn your business. As with most credit cards, they're banking on you be late on one payment before increasing to some outrageous interest rate.

The interstate rate is only relevant if you pay the minimum monthly amount due... Otherwise, you can double, triple, etc. until it is paid in full.

As fir your property, usually, you can refinance after a year or two seasoning. It depends on each lender's criteria. If you do have an excellent history with your bank, I definitely would try there first. But keep in mind, regardless when you refinance, you will lose money in the process which most will be tacked onto the loan. So it has to make sense and be for the right reasons (i.e. lower interest rate, avoid balloon payment, etc).

A letter of explanation may suffice regarding your loss but again it depends on who the lender is and the underwriter working your loan.

Bottom line like any lender, they want to make sure you are good for the loan and in the event you default (which we know is a liability they do not want to incur as it's all about performing notes), the collateral is worth backing the loan.

Not sure how this will kill your credit score unless you have placed yourself in a pinch and forsee missing future payments.

If that's not the issue, then you should be good. Just like anything else do your due diligence on multiple lenders and retrieve what they have to offer before running your credit.

I'm not sure if I even scratched the surface but I hope this helps a little.

Just my two pesos.

Big Henry

Kristin Whitfield · Answer

You all are so helpful.  This gives me some much info to consider

Thanks

Jerry W. · Answer

I agree with @Minh L. about going in and talking with the banker who made your current loan and get information on what they want.  You do not need to apply until you get feedback.  it will help strengthen your relationship with that bank and hopefully be educational.  It might help to wait until your 2014 taxes are filed to show a good year, but I understand that it is uncomfortable having huge amounts outstanding on a credit card, even if it is free interest.  let us know how it turns out.

How Long till I ReFi my 8 unit Building

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