Refinancing Rules for an Apartment Building

[Keith Linne]

Hi everyone!

I began my real estate journey as a full-time rehabber (completed about 30 rehabs from roughly 2011-2014), and have since transitioned to full-time client work as a general contractor. In addition, I've been working to build my personal portfolio of investment properties. I currently own 2 triplexes (with a partner), a duplex, and 2 single family homes. I maintain both my builder license and real estate broker licenses, as I find it helpful to be able to keep tabs on the market. I've also been an agent on over 100 transactions. Based on all of this experience, I am very comfortable in the residential realm (1-4 units). 

I am always open to deals that make sense, and this weekend my agent brought me a very interesting 18 unit apartment building for sale. I'm hoping we can get this deal under contract (currently working against another offer, etc), and I'd love to gain some experience in the commercial world. 

My question for you pertains to financing. I understand financing vs delayed financing vs cash out refi vs refi in residential (and most of the nuances that come with each); however, I am unsure of how all of this (if any of it) comes into play on the commercial side, being that Fannie and Freddie don't run the show. 

In this case, I'd be assuming an existing CD balance ($1,125,000 @ 5% interest only, 4 years remaining), and bringing a 20% down payment as a mix of a private capital and my own capital. Are there any restrictions regarding refinance in the commercial world (seasoning periods, 70% LTV max, etc), or can I simply complete a standard refinance when the time comes (80% LTV, 20-25 year am, 5 year rate lock, etc)? Any issues if I involve private capital (loaned, no ownership %) on the down payment side of things, or is it best to use my own capital only?

We're aiming to purchase the property, turn units, and raise rents to be much more in line with market. This should be doable in 12-18 months. After stabilization is complete, I'd like to pursue the refinance to free up capital. 

Here are the deal specifics:

Purchase Price $1,410,000

CD Balance $1,125,000 balance

Down Payment $285,000

ARV ~$1,700,000

Refinance at 80/20 = $1,360,000 new loan balance (leave $50,000 of capital in the deal).

I apologize if much of this is beginner stuff - just working to understand the other side of the investing world! I have begun discussion with a few local commercial lenders; however, I was hoping to get some input on BP from the experts on the commercial side of things. Any input is greatly appreciated. Thank you!

[Greg Dickerson]

Hi keith,

I love your story. I started out pretty much the same way except I was a GC first then started doing deals. I have since done over $200 million so keep up the good work!

In answer to your refi question prepayment penalties and loan defeasance will vary. You need to see the loan docs to determine that. Also a deal this small can easily be done with a local bank. They are usually way cheaper and quicker for smaller projects under $5 million however they will take a closer look at you so you will need a strong balance sheet or a KP to come along side you.