Which Type of Commercial Loans ?

Question

If I'm looking to acquire an 100 unit apartment building with the plans of of refi cash out at year 3 or 4 returning all member capital and then resell maybe in year 6 or 7, from your experience what type of commercial loan would fit this exit strategy?

And or,

If I'm looking to just liquidate in year 4 or 5 with out refi cash out what commercial loan would be good for this model?

Thanks in advance for your consideration

Andrew Cushman · Answer

@Tj Hines, as @Carlos Flores mentioned more info is needed.  However here are some options:

1.  Agency (Fannie/Freddie) debt.  Pros: low fixed rate, assumable, non-recourse.  Con: must be assumed to avoid hefty prepayment costs.  If you want to pull cash out, you will need to get a supplemental rather than refi.  I just completed a Fannie supplemental on a 96 unit property this past Monday and it worked out great.

2. Bank:  Pros: negotiable/flexible terms, no prepayment penalty or short step down penalty, rates can be low or high, easier to refi out of  Cons: usually recourse, may not be fixed, longer terms (7-10 years) may not be available.

3.  Life Company:  Very similar to bank. Difference is you can get non-recourse for a slightly higher rate.

4.  CMBS: generally higher rates and a giant PITA.  Some guys use CMBS effectively but I have always found better options.

I regularly use options 1-3 depending on the deal as our strategy is similar: purchase, add value and reposition, and then pull out cash to return to our investors.

Andrew

Andrew Cushman · Answer

@Tj Hines, let's say you originally got a $1,000,000 loan, and now your property is worth $2,000,000.  Then let's assume the lenders you are working with will go up to 75% LTV on the new valuation.

If you get a whole new loan for $1,500,000 that pays off the existing loan and leaves you with $500,000 cash, that is a cash out refinance.

The other option (especially if your 1st loan has a large prepayment penalty).  Is to get a supplemental.  In this case, your original loan stays in place and you get an additional loan for $500,000 (the supplemental).  It's the commercial equivalent of getting a second mortgage on your house.

Andrew

Kheng Lim · Answer

@Andrew Cushman Thank you for your clarification.

Andrew Cushman · Answer

@Kheng Lim you don't have to be local to get a Fannie/Freddie loan. I live in CA and have done agency loans in TX and GA. With that said, you do need to have some kind of local presence or experience, but it doesn't have to be you. It could be a partner that lives or owns locally, or a professional 3rd party manager that is local to that region and has a good resume.  Another way is to buy property with non-agency loans and then refi into agency down the road once you have established a track record in that market.

Kheng Lim · Answer

@Andrew Cushman Do you know if the agency (Fannie/Freddie) debt/loans are only for local investors because  the borrower must have “local ownership.” This means that they can only invest in an apartment building within the community they live in?

Tj Hines · Answer

@Carlos Flores thanks for the insight.

Account Closed if possible can you go into more depth about "supplemental" and how that differs from a refi cash out? Thanks for your time and consideration

Account Closed · Answer

@Tj Hines The answer depends on the type of condition your 100-unit building is in. I would advise either doing a conventional 5-year fixed commercial loan with a 3-year prepayment penalty or a private money interest only loan for 3 years. It depends on the condition of the property.

Tony Talamas · Answer

TJ: You can consider a Fannie Mae small loan with a supplemental in years 3 or 4. You can also consider a 5-yr Freddie loan with a tighter prepay structure so that you can refi in year 3 or 4. I’m a direct lender. I’ve worked with a lot of independent owner-operators to successfully close their first multifamily transaction. Feel free to contact me to discuss loan options and how to prepare for a smooth and successful loan closing.

Tj Hines · Answer

@Stephanie Potter will do thanks ...

Stephanie P. · Answer

@Tj Hines

PM me.  I can point you in the right direction depending on your experiece level.

Stephanie

Which Type of Commercial Loans ?

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