All Forum Posts by: Matty Foley

@Stephanie P. I don’t understand the nugget of wisdom! Can you explain?

@Kelly McMillan are you working with a commercial bank? It doesn’t add up for me.

1) The terms are FAR to aggressive for an investment property cash out refinance. I can’t imagine a scenario that they would offer you terms like this before underwriting. 10 year fixed is rare in itself for this asset type. Let alone 20, at 3.75%. Are any other lenders or investors seeing 20 year fixed rates below 4% doing a commercial loan? If so, the Bank is not going to be around very long

2) For a loan of this size, an upfront fee of that size is a big red flag. If anything you should be getting charged a a quarter point to full point origination fee due at closing. *Yes, for large deals an upfront fee does sometimes occur upon acceptance of the commitment letter; but it would be refunded as a credit towards the borrower at closing. The only reason the bank would keep the fee is if the borrower willfully decided to not go through with the loan. With that said, for large loans in the million + range, the upfront fee would be not much more than what they asked of you. Again, makes no sense to me.

It doesn’t have any traits of a typical commercial loan.

@Erik Hatch why Wyoming? out of curiosity

@Shafi Noss I'm not an attorney but I'm almost positive Maryland is the same. I've never seen an LLC without a registered agent. It can be yourself - just someone and somewhere to accept legal paperwork. Not a huge deal IMO. Maybe someone on the site can share more.

@Simon Hernandez if you went through a commercial bank and depending on the strength of the deal you would be looking at:

-Low to mid 4’s rate

-5-10 year fixed (more likely 5-7).

-Up to 25 year Amortization

-Half point to a 1 point origination fee (quarter point if you a strong)

-Some type of prepayment penalty (5,4,3,2,1 / 3,2,1,1,1)

It’s a tough call. I’d go with the short term for cash flow purposes right now now and take the gamble that rates will not increase that rapidly. At the moment and for the next few years at least (would be my guess), you are stuck with a terrible rate by accepting that.

@Guifre Mora @Tyson R. I am not very familiar with Banks outside of Maryland/DC/VA, but it's commonplace in these areas for the bank to require no seasoning period. My bank, as well as many of the banks I often compete with, will start the refinance process the very same day the property is leased. So maybe it's rare in some places, but I wouldn't understand why that would be the case. call the community banks near you and talk with a commercial lender. Do this a commercial loan and I'd bet you find a bank within your first few calls. Good luck.

@John Huynh taking a loan from your 401k would be quicker, but it's not highly advised. The best route would be to apply for a home equity line of credit (not cash out the equity you have in your current property). With a HELOC, you can find banks that will offer you 80%-90% of your current equity. You only have to use what you need, and you will only have to make interest only payments initially. Many HELOCs will offer 10–15 years of interest only, and then term out the balance with P&I payments for another 10-15 years. If you cash out equity you'll have to make principal and interest payments immediately, which will only hurt your cash flow. The only downside is it's usually floating rate. You can usually opt for a fix rate, but the rate will increase by 1%-2% if you go that route. I look at borrowing from your 401K as a last resort. If you are desperate for the money quickly and have a wealthy friend or relative, you could always ask them them to front you the cash - if you've been approved for a HELOC you can tell them you are going through the process and will have funds available to repay them very soon. Make sure your approved before going that route.

@Ben Feder the above posts are correct about equity, but to better clarify for you; by renovating and getting it leased you are adding value. When you refinance this using a commercial loan, they will see the income of the property as the primary source of repayment to service the debt (mortgage payment). A bank will usually determine your net income by reducing your gross rental income by 25% to 30% to factor in expenses and vacancy. So if your annual gross rents are $20,000, your net income will be calculated at 70% of that figure (14,000). They will want some cushion to make sure you can cover the debt if things go sideways, so you will want your net income ($14k) to cover the debt at a minimum of 1.2 to 1. Meaning your annual mortgage payment should be a maximum of $11,600 ($14,000 / $11,600 = 1.2x). As long as the property meets this requirement, and you are in decent shape financially you should qualify for a cash out refinance of around 75% depending on the bank. If you were under a 1.2 to 1 coverage ratio, they could simply reduce the cash out to 70% or whatever % would reduce the debt payments to get you to a 1.2 to 1. They will also want to make sure you aren’t losing money on other properties or business ventures that would prevent you from paying back the debt. If you have other forms of repayment such as good liquidity (cash/stocks), salary or other types of income, equity in other properties, that will show them you have a secondary source of repayment if something unexpected happened; for instance if you lost your tenant and the property remained vacant for a long period of tame. That’s the underwriting side of things on a commercial loan. But to summarize, as long as you qualify, you can expect to cash out approximately 75% of the appraised value of the property - after renovations are completed and the property is leased. Banks are mostly conservative when approving a cash-out refinance for investment properties, so its just another good reason to be conservative in your initial projections.

@Eve Cao There are two general assumptions that most believe will occur in the near future: 1) The market is due for dip in the next few years 2) Interest rates will likely rise over the next few years. No one can be sure about either, but that’s what most of us believe is coming sooner than later. So at this moment in time, you may want to focus more on cash flow. If we are possibly at the peak of the market and home values begin to fall, you may be looking at years to get back to current value. On the other hand, if you can get a 5-7 fixed rate in the mid 4’s and in 3 years time we are looking at rates in the 6% + range, cash flow would become tougher, especially in a downmarket. Personally I’d still look for both, but just some general thought on why cash flow might edge appreciation when buying in 2020.

For a few years now, I typically refinance a few BRRRR every month - and I've learned a ton. I have investors that crush it almost every deal, and others that haven't come close to their projections.

I'll start it off with a tip: If you are an active investor and are able to find a neighborhood or development where you can consistently find undervalued homes. Realize that if you buy a few of those properties at low price points, you are single-handedly decreasing future appraised values on each subsequent purchase in that territory. You are setting the comps in that market. It's easy to forget when your first property in the area appraises high, you assume the next purchases are almost identical properties so will appraise at the same value. Forgetting the appraiser is using sales comps, not current value comps.