When should I Refinance this apartment complex?

Question

Hey guys,

I'm currently finishing up renovations on my first apartment complex (A 5-unit property). I'm looking to cash out refinance based on the new NOI. In order to get the maximum value, do they appraise based on a trailing 12 months or just based on where rents are currently at. Essentially do I need to wait 12 months after putting my last tenant in to get maximum appraised value?

James Allen · Answer

Thank you @Greg Kasmer & @Andrew Syrios, that was very helpful!

Greg Kasmer · Answer

James - I would do as Andrew suggests and call around to some banks to get their opinion. I think you'll have a lot more success once the NOI is stabilized for 90 days, so my bet would be that you would not have to wait a year. I've found regional credit unions to be a good place for flexible terms and reasonable rates. Congrats on the renovation!

Andrew Syrios · Answer

Some lenders want a trailing 12, but are willing to go off a shortly history and the pro forma. They're more likely to do that if they have a relationship with you. The best thing to do would be to talk to some banks and see what they're willing to do. (Although you may also want to hold off on refinancing until rates cool off, although I would unfortunately, be surprised if that's before 2024.)

Ari Stern · Answer

For commercial multifamily properties (5+ units), lenders want to see that the property is stable. Typically, that means "90 for 90" – at least 90% occupied for at least 90 days.

When getting financing, the appraised value of a property is always vital. However, as far as how much the lender will give you (especially when refinancing within a short period of time from when you purchased the property), will have a lot to do with your total cost basis in the property, as lenders tend to want the borrower to have skin in the game.

Like everything in life, exceptions are always made. But the typical rule of thumb is as follows:

<1 Year – up to 80% LTC

1-2 Years – 90-100% LTC

2+ Years – 100%+ LTC

For example: say you bought the property for $900k (including all closing costs), and invested $100k in improvements - ($1MM total cost basis). Even if the new NOI gives the property an appraised value of $1.5MM, if you refinance within a year of purchasing the property, the lender will usually only refinance you up to $800k.

When should I Refinance this apartment complex?

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