Leveraging existing 4plex (owned outright) for another deal

[Jefferson Smith]

(Intro note: First time poster; regular pod listener. Have begun focusing on real estate investment in just the past 18 months, doing 3 deals, so I'm a relative newbie; confident I'll have follow-up questions. And thank you!)

I own (through a trust) a Fourplex, purchased this year, owned outright (per a 1031 exchange). It was a Buy, Rehab, Rent and ____. There was no financing, so it's just a BRR_...and would like to explore the brrRefinance of some sort. (It generates ~$4400 gross monthly rent with a Zillow value (I know that doesn't count) of 540k.) 

I want to use the asset to leverage another multifamily property. What's the best route? Commercial loan 30% down with 5 years fixed (that was a local bank's initial suggestion)? Conventional mortgage on the NEXT property, and just use income from the initial fourplex, without burdening that initial fourplex with debt? Something else? 

[Doug Smith]

Hey Jefferson, I was a credit officer in both huge national banks and local community banks, so I'll approach your question from that angle and only discuss the mechanics of the financing rather than the wisdom of holding vs selling (that's something you can figure out, I am sure). A four-plex can fall under consumer, residential guidelines or commercial underwriting guidelines. Large, national banks typically don't have an appetite for deals like this and the folks at the branch level don't typically have the credit background to understand the deal anyway. I would stick with the small community banks with an experienced lender with actual credit authority. Believe it or not, lenders typically start at large banks and they "graduate" to community banks after cutting their teeth. National banks require the loan to go to a central underwriting department. Community banks typically decentralize the decision making process for smaller deals like this one into the hands of local officers. If that officer has experience and a formal credit background, ask them what their loan limit is. That is the amount that they can unilaterally sign off on to make the loan decision without going up the food chain or to a loan committee. The loan limit will be different for real estate backed and unsecured loans. If the officer's loan limit is greater than your loan request, you are probably talking to the right person. They can tell you whether a deal will fly or not. Most banks hate backing real estate investors. They also will usually want more than 18 months of experience as well (usually at least 2-3 full calendar years with tax returns to back the cash flow). Find the person I described above and they should be able to give you the answers you seek. Good Luck!