Refinancing an Owner Financed 8 Unit property

[Ali Clark]

Hi all,

I’ll save you the details of why the property I am looking at works and get to the point. This is my first post so forgive me if I am not following the usual conventions or standards but I think I woke up with a good idea and I wanted to run the feasibility of it by experienced investors. 

Currently I am looking at purchasing an 8 Unit building in the state of Alabama. All financing options through banks require the ugly 25% down payment which I can just barely afford. This property happens to have an owner willing to owner finance however! I like the idea because I can put less down and have some cash left over for any problems that might arise down the road. The basic terms of the deal are: 15% down with a five year balloon and a 7% interest rate. 
My question is will I be able to refinance an 8 unit property easily after let’s say year one (which would save me the extra money down up front)? This would be my first commercial property purchase so I’m not sure of the usual conventions. I will be calling my bank to see what they’d advise as soon as I get back in the country but I figured I’d ask everyone here. 

[Peter Nikic]

It could. One potential problem is that your 15% down today may be a lower $$ than the 25% required next year. 

It could be tricky. Even if value goes up, the bank may appraise for lower. Bank will finance 75% of appraised value which could be very different from what you think it may be valued at.

ex: if you purchase for $800k with 15% down (you'll need $120k). if bank appraises property next year for $800k, you'll need an additional $40k plus closing costs to close. You'll need the bank to appraise property at $900k in order to not have to put any more money down. This is going to be unlikely in one year unless there's a lot of upside to this property.

If the property can produce a lot of extra cash (after ALL expenses are paid), then that could be a way for you to save the additional cash needed at refinance. This is a great way to do it if the property leaves a good profit. Essentially you use the property to help you generate the future down payment.

My other suggestion is get the property with owner financing as you intend, but don't put the 1 year as a timeline. You refinance when you're ready. It could be a yera, but it could very well be 5 years. Don't rush/push it. The extra interest you're paying is the offset of a higher downpayment. For you that might mean the difference of buying it or not buying it. 

Good luck