Can I cash out refi to commercial loan and then refi back?

Question

Quick version: Can I cash out refi to a commercial loan and then refi back to a conventional mortgage? Realizing the obvious spending of closing costs, are there other down sides or obstacles preventing me from doing this?

Additional details:

I've vented about this here before but I've been looking for a lender forever who will value my property based on the income its generating rather than "comparable properties". There aren't comparable properties within the radius they're willing to search and ultimately every traditional mortgage lender I've looked into only wants to value on comparable sales and disregards the fact that my units are bringing in double the comps being shown in the appraisal. So I've decided to go with a commercial lender who will value based on income but obviously the rate is much higher. I currently have a 4.2% 15 year mortgage. New loan would be 6.5% and TBD on term. I'm pulling cash to purchase my next rental but wondering if there is anything that would stop me from later refinancing back to a lower rate traditional mortgage once the deal is done? Feel like 2% interest savings would add up pretty quickly and be worth the added refi cost.

Chris Mason · Answer

The exact same issue that is preventing you from getting a residential loan now will also prevent you from getting a residential loan in the future, unless something changes....

Stephanie P. · Answer

You've got a few things going on here.

• If "there aren't comparable properties within the radius they're willing to search", then you've got a property that is unique and virtually no lender wants to lend on a unique property.
• The reason they're only using comparable sales is because the broker/lender is selling to Fannie Mae or Freddie Mac and that's all they'll buy.  The name of the game is being able to sell the loan on the secondary market.

To answer your question though, yes you can refinance from a commercial property to a residential loan.  Things to watch for:  Prepayment penalty on the commercial loan, zoning that works for residential property, loan to value after multiple refinances.

Best of luck

Stephanie

Stephanie Medellin · Answer

@Ashly B.  If it's a 1-4 unit property even a commercial lender is going to use comps to determine value.  The programs that qualify you based on rental income still have to determine the value of the property to get an LTV, and they order an appraisal that uses comps.

Stephanie P. · Answer

Yes, but unique is never good in a lender's mind.  Unique limits the pool of buyers in the event of a foreclosure.  Historic hurts also.

Ashly B. · Answer

Its only unique in that there aren't a lot of multifamily properties selling in this area, and the few that are (literally 4 multifamily properties in the last 3 years) are just different - more bedrooms but lower rent, rundown/unrenovated, etc. It's an historic neighborhood originally constructed of primarily SFHs right in the center of a metro area in a beautifully maintained neighborhood. So when the appraiser branches out to find other 4 plexes, they go into neighborhoods a mile or so away that are significantly less desirable, poorly maintained and naturally bringing in less rents.

Ashly B. · Answer

Good point. Its not a deal breaker, just always looking for ways to cut costs and improve returns.

Sasha Mohammed · Answer

@Ashly B. This is exactly why many RE investors just stick to commercial loans. The higher rate is the price you pay for more creative qualification methods (DSCR instead of DTI). There are still institutional investors that will do this, not necessarily private investors, so the rates aren't HORRENDOUS (you can find things in the 5-7% range)... but yes, I hear you, a higher rate does add up.

The question you have to ask yourself is: is it a deal-breaker?  Is it more worth it to continue investing (assuming you're using the c/o proceeds to buy more properties) or keep your current investments at a low rate? Most of this game is leveraging/ managing debt. I can't answer these questions for you, you just have to run the numbers.

going to commercial and then trying to go back to conventional will give you the same results as what you're running into now. unless your income changes (doesn't seem that's the hold up), or unless more accurate comps pop up between now and then. But you also risk rates rising between now and then as well.

Justin Kane · Answer

find different kinds of money.. HML, Private, Non Doc, Sub Non prime etc

Ashly B. · Answer

Hm fair point. Guess I was thinking once I have a loan and appraisal showing its worth more, they are going to be less likely to turn away the business. Not sure it matters but the numbers aren't that drastically different. I purchased for $95k. Bank said it was only worth $149k after total gut and remodel. I currently owe $95k. I *think* I could put this thing on the market for $275-300k and it would go quick but honestly would be happy with an appraisal around $200k because I only need to pull about $45k for what I want to do so $200k would be sufficient to do that.

ETA thus only needing to refi a loan of approximately $140k which doesn't feel like too much of a stretch to me - I feel like they could work with it if they wanted to... alternatively, I could wait until I've paid down the new loan some and then refi once its back in the 70% LTV range which I could likely do in a couple years time

Can I cash out refi to commercial loan and then refi back?

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