Newbie question about hard money and refinancing

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Newbie question about hard money and refinancing

Alex SImon
Investor · Howey In The Hills, FL · Member since 2015 · 95 posts · 37 votes

Okay, this might be a tired old question but so far I haven't seen it covered in any detail (I might be totally overthinking the problem). A lot of people talk about using HML to get you into a deal that you might not have the capital to do on your own, and the idea is then to refinance the property to pay off the HML. But my question is, how do you know ahead of time if you're going to be able to refinance?

In this situation, I'm looking at the possibility of a small apartment complex, 24 units, should cash flow between 1-2k a month after the commercial mortgage and expenses. I plan to keep this as a long term rental property in my portfolio. However, I won't have enough capital for the down payment any time soon. The common solution to this type of problem seems to be "HML to buy the property, refi out after 6 months or so and then pay it down from there". But, being the newbie I am, I am questioning how to know if a bank will approve a refinance.

The property does not (on the surface, no inspection yet) need any serious rehab, mostly fresh paint and carpet here and there.

The property is almost fully rented and would generate positive cash flow from day one.

What other factors might play a part in whether I'm approved for refinancing?

What's the likelihood that a guy like me with good income and good credit would find himself unable to refinance this complex to pay off the HML?

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
11y

The hard money then refinance route works when you have a way to add significant value. Some HMLs will lend based on ARV. So, you buy, fix up, get the place rented, then refi based on a higher value. It rarely results in getting a deal with no cash out of pocket, but it can be less than the 25% down payment plus rehab costs.

Whether it works for this deal or not is the question.  You say it doesn't appear to need rehab.  Are the rents at market and the place is fully rented (fully for 24 units probably translates into only one or two vacancies, you'll generally not be 100% full all the time unless your rents are below market.)  A 24 unit building is valued based on the rent produced.  So, unless there's some upside you've not mentioned, you may have a hard time increasing the value enough to make this work.

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  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    11y

    @Alex SImon

    Even with a HML, you're still going to need a downpayment plus reserves and interest payments for a project of this size. Even with minor work to each unit, over 24 units it will add up. Start by calling around and ask the amount required down plus their terms.

    Regarding the refinance, same deal - call around and see what the approval guidelines are. What appraisal amount will they use? What LTV will they lend to? Then figure out if the refinance amount will payoff the HML. Remember with commercial units / loans there will be a lot of extra fees involved: two closings, maybe two appraisals ($1600 for a 5 unit that I did recently), permits, inspections etc. Factor all of that into your numbers.

    Good luck!

    - Tom

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  • M. Ian Colville
    Lender · Minneapolis, MN · Member since 2012 · 12 posts · 5 votes
    11y

    Hi Alex.  We have financed a number of deals with local banks over the last couple of years, including a 36 unit apartment building.  At the end of this message is a link to a financial model that you are welcome to borrow if you want to model the cashflows of your property.  Banks love to finance stabilized properties if the numbers are solid.  Model it out using spreadsheet below and then show the results to 3-5 banks and ask them if they would be interested in financing such a deal. 

    https://www.dropbox.com/s/aw0w31nrl06pxam/6331%20Beard%20Ave%20N%20stabilized%20valuation.xlsm?dl=0

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  • Alex SImon
    OP
    Investor · Howey In The Hills, FL · Member since 2015 · 95 posts · 37 votes
    11y
    Originally posted by @Tom S.:

    @Alex SImon

    Even with a HML, you're still going to need a downpayment plus reserves and interest payments for a project of this size. Even with minor work to each unit, over 24 units it will add up. Start by calling around and ask the amount required down plus their terms.

    Regarding the refinance, same deal - call around and see what the approval guidelines are. What appraisal amount will they use? What LTV will they lend to? Then figure out if the refinance amount will payoff the HML. Remember with commercial units / loans there will be a lot of extra fees involved: two closings, maybe two appraisals ($1600 for a 5 unit that I did recently), permits, inspections etc. Factor all of that into your numbers.

    Good luck!

    - Tom

    I was planning to try and negotiate for cash back on closing to handle some of the rehab costs.  I do have a pretty high paying job that would let me handle the interest payments and some of the rehab also.  Not saying that I have every base covered (still a newbie) but I feel confident that I could plow on through any obstacle that presented itself, so long as I found a way to finance the property in the first place.

    I think I might try to get a partner on board with this deal, someone with extra capital to take care of the purchase cost if I handle any rehab and the running of the property.  

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  • David ShortPro Member
    Flipper/Rehabber · Fishers, IN · Member since 2014 · 71 posts · 47 votes
    11y
    1-2000 positive cash flow per month on 24 units smells like a disaster. That's only $50-100 per unit. You would do much better on single family units. No room for error . Don't buy it because it's pretty.
    Podcast Guest on Show #174
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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    11y

    The hard money then refinance route works when you have a way to add significant value. Some HMLs will lend based on ARV. So, you buy, fix up, get the place rented, then refi based on a higher value. It rarely results in getting a deal with no cash out of pocket, but it can be less than the 25% down payment plus rehab costs.

    Whether it works for this deal or not is the question.  You say it doesn't appear to need rehab.  Are the rents at market and the place is fully rented (fully for 24 units probably translates into only one or two vacancies, you'll generally not be 100% full all the time unless your rents are below market.)  A 24 unit building is valued based on the rent produced.  So, unless there's some upside you've not mentioned, you may have a hard time increasing the value enough to make this work.

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