Refinance Best Practices

[Pope Lake]

Hi BP! 

I've become more interested in the multi-family space recently after reading Multi-Family Millions by Dave Lindhal and various multi-family related market reports. 

One question that has come up is around refinancing. When refinancing a multi-family project what are some of the "hurdles" that are commonly used, in terms of returning capital to your investors? 

For instance, I've heard that a refinance should be done only if 60% of capital can be returned to investors... I've also seen that this number can be 50%. What rate do you use? 

[Brian Burke]

Well, what if you can’t return any capital to your investors but you can lower your interest rate by two percent?  Or if you can get out of a three year loan and get a ten year loan?

There are many reasons to refinance, and returning capital is only one of them. If the terms of a new loan are comparable to old one, the only reason to press go might be to return capital. Doing so will come with transactional costs. What you should do here is model the IRR and cash on cash return both ways and see if the added transactional costs cause the returns to go up or down.