Cash Out R/Purchaser

[Krishna Shah]

Hi everyone,

I'm new to this. I'm helping my father expand his RE portfolio. He's obviously more experienced since he already owns one CRE property.

I have some questions.

He wants to stick to Bank Financing over private lending. His primary mortgage was sold to a private lender in the early 2000s and he claims he had to give an explanation each time as to why he financed with a private lender with such poor reputation every time his credit was pulled. Despite having an 800+ credit score.

Purchase:

He says banks don't offer 30 year loans for CRE. If that's the case is the best hope a 10/15 year loan with 30 year amortization with balloon payment due? Want to put 40% down.

What requirements do banks look for?


How would they calculate DSCR? Based on Noi/Piti derived from the 30 year amortization? Or from the actual 10/15 year loan?

Cash out refinance:

Hoping to get 70% LTV from current strip mall commercial property. 1 unit owner occupied. 30 year term. Does this sound realistic?

Would doing a cash out refinance first to purchase next property hurt the process in anyway?

What would be some common pitfalls in either transaction?

Thanks everyone.

Cash out Refi property located in Northern NJ, and hypothetical purchase mixed use or multi family apartment building located in Brooklyn most likely

[Brian Fung]

Aloha Krishna, 

I'll address each point for you: 

1. It's unusual to have be questioned by an underwriter about why he financed a loan with a private lender with a poor reputation, however, if it's a concern that he'll continue to be asked about it, I recommend creating a letter of explanation that clearly explains the situation. Every loan you do, you can just update the date and sign it. If it's well written and well documented, this will take <2 minutes for every loan you do and solve your problem moving forward. 

2. It is true that traditionally commercial loans are going to have 10-15 year terms (most commonly 10 years) with a balloon payment. This is also depending on the type of CRE property your father has. On a multifamily apartment building, getting a 30 year fixed for the life of the loan is possible and more available.

3. DSCR for commercial properties will be calculated on NOI/PITI. The NOI from your last 2 years of operating history will be looked at in comparison to the commercial appraisal. If your operating costs are below the market, your NOI will likely be matched closer to the appraisal's market rents. If your NOI is greater than the market, they'll work off your actuals. Depending on your market, you'll have to underwrite to a 1.15-1.4 DSCR. 1.15 would be VERY aggressive and uncommon.

4. The down payment is going to be completely dependent on what your DSCR allows for. You'll want to ask each lender you work with how they calculate the DSCR. They're all going to use NOI/PITI, but you'll experience a range of DSCR requirements which will directly affect your max LTV and you'll also experience a range of rates. Some lenders will underwrite off of the "Note Rate" and some will "Stress Test" the rate to a rate higher than the "Note Rate" which will give you even less leverage/lower DSCR.

5. 70% LTV on a 1. Strip mall 2. Cash out 3. Only 1 CRE property on the schedule of real estate all increase risk, so your lender would combat each risk point with offering lower leverage. Being at 65% or less would be more common.

6. Regarding purchase or cash out first, you should really run this by your both the lender you want to refinance with as well as the lender you'll do the purchase with. Anyone from the forums here is going to give a "best guess" because you're not going to post all of the financials/details/documentation that you'll need to turn into your lender to make the decision. A common metric they'll look at is your Global Cash Flow/DSCR which will be affected by your cash out refinance (higher mortgage payment than you've had in the past.

7. Your lenders should be willing and able to work for your business. So ask them to pre-underwrite your deal and give you a feel for what their best plan would be. If they can't do this for you, consider it a blessing that you learned they are inexperienced prior to going through a full loan process with them. 

Hope this helps. Aloha.