6 Unit Value Add Refinancing Strategy

[Gilbert Lowe III]

I am seeking to get a few strategy ideas for refinancing a 6 unit apartment building, in Pittsburgh, Pa,  that I own free and clear.  I bought the building 6 months ago and at the time it was 50% occupied and the rents were 30% below market.  Since then I made improvements and raised the existing rents to market rate and I fully renovated 2 of the 3 vacant apartments and got them leased up.  I am about to begin the renovation for the 6th apartment and I already have a waiting list of potential tenants for this apartment.  I want to have a refinancing strategy in place so that when I finish this renovation I know my next step.

I had conversations with a few lenders and they have seasoning requirements that will not allow them to do a cash out refinance based on the newly appraised value of the building until I have owned it for a year. I know lenders that will lend based on the price I paid for the building but this would leave the equity tied up in the building and I want to use it for my next deal. The NOI is $30k ( including a vacancy factor of 5%) so based on a 10% cap rate it should appraise for $300K.

Im interested in knowing how some of you would handle the deal? 

[Jeff Ronningen]

In my experience the lender will use the lesser of purchase price plus the amount of improvements you can document or the appraised value. Assuming you qualify based on income and credit you can probably borrow 70%. You didn’t mention the amount you paid for the property and in the absence of additional information I question if the valuation based on the 10% cap rate assumption will hold up. It’s really up to you whether you need to pull out cash now or if you can wait for the one year anniversary. Less leverage is safer but provides a lower return. Only you can decide the right balance between the two.