Multi-Family Refinancing/Strategy Question

Multi-Family and Apartment Investing
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Multi-Family Refinancing/Strategy Question

Nick Vought
Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes

Hey everyone,

I bought my first property a four-plex in March, and I am trying to figure out the best strategy for my next step and how to get ready for it when that oppurtunity comes. I got an FHA loan for the property which was 450k and put down 3.5% on it. It is in good condition but needs some cosmetic work. I am currently getting 875 per unit, all 2 bedroom 1 bath. I have updated the unit I am living in and believe I can get between 1000-1100 in rent for it, going off of similar 2 bed 1 bath units in the area. I would like to use the BRRRR strategy and use the refinance money to purchase my next property after I have lived there for a year. After I have lived at the property for a year, I plan on just moving to an apartment and not doing another FHA loan for at least the near future.

So my questions are:

1. Do I have to convert my FHA loan to a conventional loan in order to use the refinance money on my current property to purchase my second?

2. Does the refinance go off of just the appraisal value of the four-plex or does it also go off of the amount I am getting in rent?

3. With the rehab just being cosmetic like I said, how much should the min/max I should spend updating units? FYI I spent about 6k updating the unit I am in, but basically did everything myself. New floors, molding, LED recessed lighting throughout house, new paint, new kitchen countertops/sink, bathroom/laundry room floor tiled, shower wall tile, new vanity, new doors. 

4. Last question, would it be a better strategy to convert my FHA to a conventional loan instead of using the refi money on a second property. I crunched the numbers and I believe my mortgage payment would go down about give or take 1k a month.

Any information would be greatly appreciated, thank you!

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Jacob Murphy
Contractor · Cincinnati, OH · Member since 2015 · 92 posts · 75 votes
9y

@Nick Vought I think this is a great question. You may be able to prove me wrong but this is my 2 cents.

1. Do I have to convert my FHA loan to a conventional loan in order to use the refinance money on my current property to purchase my second? - Yes, you will need a investment property loan since you will no longer be owner occupying the property. Typically, lenders are looking to refinance at a max LTV of 75%. Meaning you will need to increase the value of your property from 450K to at least 562.5K to break even on the refinance. This will be tough to do unless you can really increase rents, then convince the bank to go off of income rather than comparable properties sold.

2. Does the refinance go off of just the appraisal value of the four-plex or does it also go off of the amount I am getting in rent? - Depends on the bank. I'd suggest using a small local bank's commercial lending department because they will have more flexibility in making this work for you circumstance.

3. With the rehab just being cosmetic like I said, how much should the min/max I should spend updating units? FYI I spent about 6k updating the unit I am in, but basically did everything myself. New floors, molding, LED recessed lighting throughout house, new paint, new kitchen countertops/sink, bathroom/laundry room floor tiled, shower wall tile, new vanity, new doors. - I say calculate how much you think your time is worth in the calculation. Then look at your rate of return for your time value + the material costs vs annual increase in rent. If I can get a 10% return or more then I am all in.

4. Last question, would it be a better strategy to convert my FHA to a conventional loan instead of using the refi money on a second property. I crunched the numbers and I believe my mortgage payment would go down about give or take 1k a month. - If I were in your shoes, I would refinance into an investment property loan at 75% LTV after fulfilling your 1 year requirment of living at the property. Then get another FHA loan for a triplex at 3.5% down and live there for a year. Next, either move to your dream house and fill your coffers from your passive income, or keep it going and buy another investment property with conventional financing (remember you are limited to 7 units using the FHA loan. That is why I suggested a triplex instead of a fourplex)

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  • Jacob Murphy
    Contractor · Cincinnati, OH · Member since 2015 · 92 posts · 75 votes
    9y

    @Nick Vought I think this is a great question. You may be able to prove me wrong but this is my 2 cents.

    1. Do I have to convert my FHA loan to a conventional loan in order to use the refinance money on my current property to purchase my second? - Yes, you will need a investment property loan since you will no longer be owner occupying the property. Typically, lenders are looking to refinance at a max LTV of 75%. Meaning you will need to increase the value of your property from 450K to at least 562.5K to break even on the refinance. This will be tough to do unless you can really increase rents, then convince the bank to go off of income rather than comparable properties sold.

    2. Does the refinance go off of just the appraisal value of the four-plex or does it also go off of the amount I am getting in rent? - Depends on the bank. I'd suggest using a small local bank's commercial lending department because they will have more flexibility in making this work for you circumstance.

    3. With the rehab just being cosmetic like I said, how much should the min/max I should spend updating units? FYI I spent about 6k updating the unit I am in, but basically did everything myself. New floors, molding, LED recessed lighting throughout house, new paint, new kitchen countertops/sink, bathroom/laundry room floor tiled, shower wall tile, new vanity, new doors. - I say calculate how much you think your time is worth in the calculation. Then look at your rate of return for your time value + the material costs vs annual increase in rent. If I can get a 10% return or more then I am all in.

    4. Last question, would it be a better strategy to convert my FHA to a conventional loan instead of using the refi money on a second property. I crunched the numbers and I believe my mortgage payment would go down about give or take 1k a month. - If I were in your shoes, I would refinance into an investment property loan at 75% LTV after fulfilling your 1 year requirment of living at the property. Then get another FHA loan for a triplex at 3.5% down and live there for a year. Next, either move to your dream house and fill your coffers from your passive income, or keep it going and buy another investment property with conventional financing (remember you are limited to 7 units using the FHA loan. That is why I suggested a triplex instead of a fourplex)

    6Reply
  • Nick Vought
    OP
    Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes
    9y

    Thanks for answering this Jacob, I really appreciate the input. So I guess my questions to counter that would be. 

    Should I update the rest of the units like the one I am living in, or should I save that money and put it towards my principal to get closer to that 75% LTV?

    How much of increase in rent do you think I would need to convince the banks? 

    What exactly do they go off of to calculate the value, is it strictly off of an appraiser? 

    If I were to qualify for a investment property loan at 75% on my current place to get out of my FHA, would my mortgage payments go down? and would I be able to apply any of that to a down payment on my next purchase?

    0Reply
  • Nick Vought
    OP
    Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes
    9y

    @Jacob Murphy

    0Reply
  • William Hochstedler
    Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
    9y

    If you continue to owner occupy, you can get loans up to 95% with no mortgage insurance on a 1-4 unit. Your sweet spot for interest rates etc will probably be between 85-90% LTV.

    There will be costs in a refi that could be over $5K.  So the calculation should be how long will it take to recover the cost of the new loan.

    Typically the BRRR strategy is used to recover your cash, not for income.

    So you need to be talking to a lender to see how long you have to hold the property before you can do a cash out refi to pay off the FHA and get your improvement money out. What kind of LTV's do they have that are better than FHA? How much do they cost?

    It sounds like, if you put $6K into each unit, you will have $24K in improvements total. Closing costs on a new loan will put your basis at $480K. It will have to appraise for a minimum of $505K to recover your $24K + 3.5% down on the FHA. Is this realistic?

    It will be appraised strictly on comps.  You will not find a better commercial loan than a current conforming owner-occupant 30-year fixed  right now.

    Good luck!

    3Reply
  • Andre Chambers
    Rental Property Investor · Saint Louis, MO · Member since 2017 · 53 posts · 24 votes
    9y

    @Nick Vought

    Great questions.  I had similar ones too.  Thanks for the input from everyone.

    1Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    9y

    If you have only 3.5% down, you're not likely to refinance and do better.  But if you want to try, find a lender that'll loan 75-80% of APPRAISED value (regardless of what you paid and when).  If you feel it'll appraise for 1.25x what you paid, then you can refi and get all cash out. 

    I've done that a lot, but I was refinancing out of deals that I had 20%+ in, and I was trying to get closer to 0% in.  You're already pretty close. 

    1Reply
  • Nick Vought
    OP
    Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes
    9y

    The only reason I want to refi is to use that money top purchase a second property, I don't want to you it as in income, but as a down payment for a second multi family home like a duplex. It was my understanding the the BRRR strategy was to do so. If I am looking to pull lets say 40k in refi money to purchase a 200k duplex, is that possible and would I need to owner occupy it?

    0Reply
  • Nick Vought
    OP
    Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes
    9y

    I believe with the renovations and the rental income possibility after its all said and down I could put it on the market for 550 and get offers, but I am not sure it will be appraised that high since there are not a lot of comps in the area.

    0Reply
  • Robin Boyer
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    @Nick Vought very interesting thread. I also am  considering a multiple family.  What advice would you give a newbie someone that wants to get a fixer-upper and increase the rent once a year and see it do very well.

    0Reply
  • Robin Boyer
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    @Cody L. let's connect I am also considering multiple family in San Diego!

    0Reply
  • Andre Chambers
    Rental Property Investor · Saint Louis, MO · Member since 2017 · 53 posts · 24 votes
    9y

    One of the largest factors of BRRRR is getting a high enough ARV to get some or all of your money out of the property. Per your numbers given, to get just your down payment out, you would need an appraisal of 582K for an 80% LTV refi or a 621K appraisal for a 75% LTV refi. I'm not sure if your 6K in updates can force enough appreciation to get your cash out in the refi.

    Also, from reading around posts here, I feel it's more the norm to use private money in some capacity in the buy and/or rehab portions of BRRRR. Thoughts?

    1Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    9y
    Originally posted by @Robin Boyer:

    @Cody L. let's connect I am also considering multiple family in San Diego!

    I'm happy to connect but I don't buy in San Diego.  As someone born and raised here I've looked a lot.  Never seen a multifamily that made sense.  If you see something, let me know. It would have to be 5+ as I can't get the generic conforming 1-4 family home loans.

    0Reply
  • Nick Vought
    OP
    Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes
    9y

    @Dre Scott Yeah that probably won't happen, at least not soon enough.. So for my next property, which I am going to try and purchase early next year, I should look for a private money lender to help me come up with the down payment?

    0Reply
  • Andre Chambers
    Rental Property Investor · Saint Louis, MO · Member since 2017 · 53 posts · 24 votes
    9y
    Originally posted by @Nick Vought:

    @Dre Scott Yeah that probably won't happen, at least not soon enough.. So for my next property, which I am going to try and purchase early next year, I should look for a private money lender to help me come up with the down payment?

     @Nick Vought That is totally up to you. I have not done a hard money deal yet, but I am definitely a proponent of it if the numbers make sense. HML may finance purchase and rehab and some may want you to have some skin in the game in the form of a down payment. Personally, my mortgage broker has been a good resource in the fine details of a lot of topics that were foreign to me. It has really cemented to me the importance of a strong team being in place.

    0Reply
  • Jason Million
    Lender · Englewood, FL · Member since 2016 · 81 posts · 33 votes
    9y

    @Nick Vought  

    If you are still living in the unit, you can cash out on an FHA up to 85% of as is value. (based on traditional comps) FHA rates are going to be better than conventional rates. this might be your best option to get the most money out of the property. You do not have to convert your FHA loan if you move. You will just have to buy your next property with a 5% down conventional SFR or 15% down 2 unit (if you plan on living in it)

    If you want to refi into a Conventional investment property (if you do not live there) then Fannie/Freddie allow up to 75% rate & term.(1-4 unit investment property)   This will be based on a 1007 Rent schedule appraisal you are still allowed up to 2 k cash back at closing.    

    The other option is to refi into a commercial or non-insured conventional @ 80% LTV the rates are a little higher but there are a few advantages.

    Then you could buy your next one with FHA financing again (if living in it)

    Honestly, there are a ton of options in the finance world.  Having a source of accurate info and a good plan is all it takes.  

    0Reply
  • Logan Turner
    Rental Property Investor · Dallas, TX · Member since 2015 · 283 posts · 179 votes
    9y

    @Nick Vought 

    This is how BRRR works. You buy a house all cash. You put in 10 percent, hard money pays 90 % of our Purchase price. You then pay between 0-20 percent of the Rehab with your own money and hard money covers the rest. After the property has seasoned, meaning you've owned it for 6-12 months, you can do a cash out refinance. Some lenders may require less time, especially if commercial or portfolio loan.

    recent example of what I am finishing. 3/2 1200 sq ft house. Purchase price 51k, rehab 50k, interest on 75k private loan 7k, holding costs 1k. I'm all in for 51+50+7+1= 109k. 

    House appraised for 147k. Lender will allow 75 percent LTV. That equals $110,250. 75,000 goes to private lender 30,250 goes to me minus loan origination fees and appraisal fee.

    Recap of the 109k, 75 came from private money. 34k from me. But I am able to refinance the house and take out 110k which puts me at 0 dollars in. Maybe even come out a couple hundred bucks. 

    Rent will be 1600-1800 and will leave me with a conservative cash flow of 500-700 dollars. (548 for mortgage + interest, 85 insurance, 190 taxes, 150 maintenance, 160 management fee- which I currently self manage)

    Works better for cash purchases as they sell at a discount because the house can't get financing without serious work done to it. 

    3Reply
  • Robin Boyer
    Surveyor · Hemet, CA · Member since 2015 · 797 posts · 112 votes
    9y

    @Logan Turner I am also a. We investor up in north county area considering multiple family. Can we connect? I want to follow your brrrr method you are talking about I had no idea it worked like that.

    0Reply
  • Nick Vought
    OP
    Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes
    9y
    Originally posted by @Jason Million:

    @Nick Vought  

    If you are still living in the unit, you can cash out on an FHA up to 85% of as is value. (based on traditional comps) FHA rates are going to be better than conventional rates. this might be your best option to get the most money out of the property.

    So I can cash out up to 85% of as is value if I am still living there, no matter how much equity I have built up into the property? if so how long do I have to stay at the property if I do so?

    0Reply
  • Jason Million
    Lender · Englewood, FL · Member since 2016 · 81 posts · 33 votes
    9y

    @Nick Vought Yes, correct. There is no set time limit that you have to live there after you refinance, just as long as it is your primary house at the time of closing and you still occupy the property.  

    0Reply
  • Nick Vought
    OP
    Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes
    9y
    Originally posted by @Jason Million:

    @Nick Vought Yes, correct. There is no set time limit that you have to live there after you refinance, just as long as it is your primary house at the time of closing and you still occupy the property.  

    What do you mean by time of closing? closing on the deal? sorry if this is a silly question.

    0Reply
  • Jason Million
    Lender · Englewood, FL · Member since 2016 · 81 posts · 33 votes
    9y

    @Nick Vought When you refinance and close on the new loan for the current property. 

    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    Howdy @Nick Vought

    The primary thing you should do right now is determine the current ARV/Market Value of your property using good comps. That will tell you if you will be able to pull any cash out (no matter which refinance you choose).

    What kind of Cash Flow will you be getting with your current mortgage payment (once you move out)?  If you do a Cash-out refinance your mortgage payment will increase with the larger loan.  What impact would that have on your Cash Flow?

    It is difficult to do a true BRRRR strategy (100% cash back) in combination with a House Hack. This is because of 2 things. You usually do not have enough equity (minimum down payment) to get any cash out. And you usually have to do more than simple cosmetic Rehab to force enough equity appreciation to make up the low down payment.

    I think what @Jason Million is recommending is your best option.

    0Reply
  • Nick Vought
    OP
    Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes
    9y
    Originally posted by @John Leavelle:

    Howdy @Nick Vought

    The primary thing you should do right now is determine the current ARV/Market Value of your property using good comps.

    What if there are not a lot of comps in the area? That was problem we had with the original appraisal of the property. If I could bump the rents up from 875 each unit to 1200 each unit after they are all remodeled, would that effect the new appraisal? The few comps in the area are a little run down and smaller then my property and on the flip side of that there are other properties that are up to date but have a few more rooms/units.

    0Reply
  • Nick Vought
    OP
    Rental Property Investor · Salt Lake City, UT · Member since 2016 · 22 posts · 7 votes
    9y

    I don't need 100% cash back just enough for a down payment on a duplex.

    0Reply
  • Jeff Kehl
    Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
    9y

    @Nick Vought let me suggest a different line of thinking. You just bought this property in March right? 3 months ago? Slow down a bit and focus on it before you move to the next step. Coming from me this is a bit ironic because I am always full-throttle 3-4 things going on at once but looking back I would have benefited by taking a chill-pill and focusing more. 

    Is everything good at the property? Are the other 3 tenants happy? You asked about criteria for whether to update the other units. Forget the 'force appreciation' thing for a minute. Have you done an evaluation of them? What kind of shape are they in? Hvac, floors, paint, counters, cabinets,etc? Do they need upgraded? How are your tenants feeling? Do you think they want to stay? What is your primary competition and what rents are they charging?

    Ok, now that the drudgery is out of the way, let's talk about the topic I like which is how to buy more! You might be ok with some of the refinancing things you're talking about but more often than not you are going to have to give that some time to work.

    Think about what you're asking. 3 months ago you put a small amount of money (3.5%) in and were lucky enough to buy a half million dollar property. Now you want someone to say you did such a great job on that one, they should take $50k of their money so you can do it again.

    That kind of thing does happen but it is not very rational. People or institutions will not or should not give you money for no value returned. What value have you added? I guess $112.5k rental units are a great deal in your area. But when you add $6k +labor to them are they worth much more?

    Am I saying you should not work on the duplex angle? No, I personally would partner with you on it and put up the $50k down-payment if it were a good deal on purchase OR IF THE VALUE COULD BE CREATED. But no thinking person (which excludes the government) is going to support you buying another retail priced property.

    1Reply
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