All Forum Posts by: Raj Patel

Quote from @Robin Simon:

Yes, when you say building / cap rate - are you talking about a commercial property?  Going to be very different cash-out refi options depending on the type of building/tenants

Yes a commercial property. Your standard retail building with a few tenants. 

looking into different cash out options, but I feel sticking with conventional for the cash out refinance, but flipping to DSCR lender for the next purchase of mixed use real estate is the best of both worlds. 

Quote from @Erik Estrada:

Quote from @Raj Patel:

Hi everyone.

I own a retail building with a partner under an LLC.

Under very conservative valuation at 8% cap rate, I believe the building is worth $1.6M+

I was thinking about doing a cash out refinance at $1.1M with a 30 year term. 

The building is fully occupied as of 2024, and has been showing consistently higher gross rental income on the tax return every single year. 

What are the requirements lenders look for in this scenario? Would it be best to use the bank I have now for the primary mortgage? My worry with them is that their appraisal was way off when I purchased the building, and they used a 10% cap rate which makes zero sense. I made up the gap in their 75% LTV back then.

Besides NOI/Cap rate/LTV (70%) what else would lenders look for? Would I need to submit my personal tax returns, along with those of my partner? Just like with a residential mortgage would they need business tax returns as well for add back purposes? Would our personal mortgages count against us for a cash out refinance? How would they determine qualifying income? Would our gross income with add backs be divided by our ratio in LLC that owns the retail building to cash out on?

Once the cash out is done, I hope to follow the BRRR method and purchase new properties. What would a lender look for then? Same process as a personal mortgage for commercial?

This is a 2 way transaction. Cash out refinance, Purchasing new properties, and searching for them could take up to 4 months I believe. 

Thank you for your help. 

Hey Raj, 

Where is this property located at? and When was it purchased?

Each commercial lender has a different method of underwriting a deal. Some simply care about the value, condition, and DSCR others will look at DSCR + Personal and Business Income and will use a global cashflow ratio. 

Thanks for your reply. The retail building is in NJ. Purchased awhile back, and loan fully paid off in 2028. Current loan <4%. Remaining principal $300k. 

Thought about doing a cash out refinance using current bank lender, or any other conventional lender. Should be able to net $800k with a new $1.1M loan. 

But flipping to DSCR lender once ready to purchase new mixed use properties.

With conventional mortgage rates hovering around 7% for 30 years… cash flow basically happens at 6.5% cap rate and above. If you don’t care about cash flow year 1 you can go down as low as 6% cap rate and still break even. This assumes 25% down.

Now in markets like Manhattan it’s hard to find a seller willing to go to 6.5% or above in areas outside Harlem. But in other markets in NYC/N-NJ it’s doable.

DSCR starts at 8% for borrowers with strong credit scores (800+ which I have btw) but at 8% at 30 years 75% LTV you would need to buy at 7% cap rate to just about break even.

This becomes much harder to find properties. Also the DSCR ratio at 7% cap rate is barely above 1. Would it even be approved?

I’m so lost. What am I not seeing?

I see the advantages with DSCR… in that unlike conventional mortgages which have a 10 property cap, and it becomes exponentially harder to purchase each time… DSCR allows you to build a portfolio.

But the math doesn’t seem to work at all.

Can anyone help?

Thanks!

Let's assume the property has $313,000 in NOI

Valued at

6.26 M 5% cap
loan $4,695,000

P+I annual= $413,400> NOI

5.216M 6% cap

loan $3,912,000

P+I annual= 344,460 > NOI

4.47M 7% cap

loan $3,352,500

P+I annual= $294,708 <NOI cash flow +

With conventional mortgage rates hovering around 7% for 30 years… cash flow basically happens at 6.5% cap rate and above. If you don’t care about cash flow year 1 you can go down as low as 6% cap rate and still break even. This assumes 25% down. 

Now in markets like Manhattan it’s hard to find a seller willing to go to 6.5% or above in areas outside Harlem. But in other markets in NYC/N-NJ it’s doable. 

DSCR starts at 8% for borrowers with strong credit scores (800+ which I have btw) but at 8% at 30 years 75% LTV you would need to buy at 7% cap rate to just about break even.

This becomes much harder to find properties. Also the DSCR ratio at 7% cap rate is barely above 1. Would it even be approved?

I’m so lost. What  am I not seeing? 

I see the advantages with DSCR… in that unlike conventional mortgages which have a 10 property cap, and it becomes exponentially harder to purchase each time… DSCR allows you to build a portfolio.

But the math doesn’t seem to work at all. 

Can anyone help? 

Thanks! 

Let's assume the property has $313,000 in NOI

Valued at 

6.26 M 5% cap 
loan $4,695,000

P+I annual= $413,400> NOI

5.216M 6% cap 

loan $3,912,000

P+I annual= 344,460 > NOI

4.47M 7% cap 

loan $3,352,500

P+I annual= $294,708 <NOI cash flow +

Hi everyone. 

I own a retail building with a partner under an LLC.

We have around $300k in principal left, and I was thinking about a cash out refinance. 

Even at a conservative 8% cap rate the building is worth around $1.625M. I was hoping for a new loan of around $1.1M thus cashing out with $800k. 

One concern is we found a new tenant in 2023 and gave him a 4 month break on the rent because he invested massive amounts into the renovation. We also had an eviction and lost around $15k in rental income in 2023. But in 2023 we had a $40k deposit in back rent from 2022. The CPA is still doing the tax return. 

But 2024 is looking to be around $168k in gross rental income without any disruptions and $30k in property tax. 

The building is fully occupied as of April 2024. Every year has only shown a rise in gross rental income. No down word trend ever. 

What would be the best way to move forward? 

My goals would obviously be to get the best possible interest rate, and a 30 year term. 

What would lenders look for in both scenarios, and what would the pros and cons of each path moving forward? 

Hope to use proceeds T ($700k +$100k emergency fund) to purchase $2.8M (25% down)worth of RE mixed use in Northern NJ/NYC.

thanks 

Hi everyone.

I own a retail building with a partner under an LLC.

Under very conservative valuation at 8% cap rate, I believe the building is worth $1.6M+

I was thinking about doing a cash out refinance at $1.1M with a 30 year term. 

The building is fully occupied as of 2024, and has been showing consistently higher gross rental income on the tax return every single year. 

What are the requirements lenders look for in this scenario? Would it be best to use the bank I have now for the primary mortgage? My worry with them is that their appraisal was way off when I purchased the building, and they used a 10% cap rate which makes zero sense. I made up the gap in their 75% LTV back then.

Besides NOI/Cap rate/LTV (70%) what else would lenders look for? Would I need to submit my personal tax returns, along with those of my partner? Just like with a residential mortgage would they need business tax returns as well for add back purposes? Would our personal mortgages count against us for a cash out refinance? How would they determine qualifying income? Would our gross income with add backs be divided by our ratio in LLC that owns the retail building to cash out on?

Once the cash out is done, I hope to follow the BRRR method and purchase new properties. What would a lender look for then? Same process as a personal mortgage for commercial?

This is a 2 way transaction. Cash out refinance, Purchasing new properties, and searching for them could take up to 4 months I believe. 

Thank you for your help. 

I do expect the 7.8%/year annualized gain to slow down due to long leases with my tenants with minimal gain in NOI every year moving forward.

I'm not sure if this a success story, but I'll still share. 

I was going through the price history on a commercial property my family owns. This is based on deeds in the county clerk land records office. 

Without getting into the specific numbers on sale, or year I'd like to share the property appreciation. This does not include cash flows, but just price sold from one buyer to the next, and current appraisal. We bought it  6 years ago and spent $120,000 on renovations.

I'd like to one day find all the deeds on the property going back to 1857 just to get a more accurate picture. 

43 years: 4,400% gain (annualized 102%/year)

26 years: 144% gain (annualized 5.5%/year)

6 years: 47% gain (annualized 7.8%/year)

Besides Real Estate where else can you see these kind of gains, tax benefits, and leverage?

Keep going everyone, and don't stop. Aim for the moon. 

I've been trying to plan how to make my move. 

The situation is that I own a commercial retail building. 

Due to inexperience opted for a 10 year loan which is going to clear in 4 years. Refinanced during the pandemic, and was able to drop the rate to <4%. Due to new tenants, and improvements I made to the building even at a conservative 8% cap rate (my purchase cap rate) the building is worth around $1.6M. I've seen commercial property in the area go as low as 6% cap rate in that case it would be valued around $2.1M. This is not Manhattan to expect >/=5% cap rates, and I'm honestly not that greedy. 

I'm not looking to sell, but I was thinking about cash out refinancing at 70% LTV.

When I explored this option in 2020 my lender said it wouldn't be possible because of occupancy issues (building was not fully occupied), and DSCR. I dropped my plans then given the state of the world in 2020.

Now its 2024, and I have around $300K in principal left on the loan. 

I see the following options in front of me: 

1. I've never done the cash out refinance option before, and I'm not really sure how lenders make their valuation, or appraisal. My lender used an insane 10% cap rate when making the initial loan which is why I made up the gap. This time I do hope to use multiple lenders, and the area has seen a decent amount of gentrification so assuming the $1.6M valuation, I hope to cash out with $800k. Assuming current interest rates my debt service would be around $87k/year (30 year, 7%)  which I am comfortable with. Even if the appraisal comes out higher, I don't think I plan to borrow more than $1.1M just to be on the safe side. But is this option worth it? I would be replacing a sub 4% loan with 4 years left with a 30 year loan at 7%. Granted I could always refinance when rates drop, but that drop may not happen until 2026 with the roaring inflation data that just came out today. I plan to use the $800K to buy mixed use retail/MF, or just MF property(ies) in Northern NJ/NYC 4 boroughs minus Staten Island. $800K would allow me to access $2.6M+ worth of RE. 

2. Hold off on my plans until 2026 when rates will drop, and I'll cash out with $950K ($3.1M+ RE). Similar plans as above, but obviously will have an opportunity cost in terms of lost equity in any future properties for 2 years time, and lost cash flow. There is also the chance that these said future properties will be more expensive to purchase due to 2 years of increased NOI on the seller side. But the benefit is lower rates on the COR from day 1, and lower rates to purchase on day 1.

3. Wait until 2028 when I will have no principal left, and take out the entire $1.1M ($3.6M+). I believe interest rates will be down to their historical average like in 2010s at sub 4%. 

Hopefully I made sense. What would everyone do if you were in my situation? 

I don't regret losing time in 2020-2023 because the occupancy situation, and rent situation was debatable. Also with a 10 year loan I had no cash flow, and it made no sense to do a cash out refi from 2018-2020 due to very little going towards my way anyway. It's also not good to dwell on the past !!