I'm under contract to purchase a 5 unit multifamily building. Being over 4 units makes this "commercial" from a lender perspective so I'm going through my first commercial financing process. The lender is looking for 20% down which I plan to do with a HELOC I've already got in place. What I'm wondering is whether or not anyone has ever done a BRRRR under a commercial loan. I've got to get my HELOC $ back out or I won't be able to scale up and repeat this again. Any thoughts?

Some more details: 

Contract purchase price - $144,000

Assessed value - $189,000

Cap Rate @ $144K - 14.7%

Property value @ 10% Cap Rate - $197,000

Lender informed me that they will loan 80% LTV or purchase price, the lesser of the 2 - so not possible to loan 100% of purchase despite results of valuation.

Any thoughts? BRRRR potential? Other ways to get my ~$30K out for additional investment?

Jake

Yes, doing a BRRRR on commercial real estate is done all the time. Buy the asset, add the value, prove the income and then refi. You likely will need to season it for 6-12 months before most lenders will want to lend on appraised value alone, but call around to all of your local banks.

@Jake Marin that is the most common way to invest in commercial properties. Looks like a good investment for you by the numbers provided. Just verify with the bank that you will not be charged a lot if you refinance in about a year. 

Thanks @Todd Dexheimer and @Oleg Shalumov ! I was hoping that it would be possible to skip the refinancing step by structuring the loan around the ARV since the current value is so much more than the purchase price but the lender shot that idea down firmly.

Have you ever heard of 100% financing on commercial loans based on an appraised value that is significantly higher than the actual purchase price? 

Yes, commercial re-positioning is BRRR on steroids...except that the property cash flows during the re-positioning and the apartment management company often manages the process.

Why is the purchase price 30% below market value...and is 10% the cap rate for this type of property in it's existing condition?

Can you define "re-positioning"? I like the sound of "BRRRR on steroids"!

Excellent question on why the unit is below market. The property had very high expenses - water, electric, and heat all WAY higher than normal. I feel confident that these issues have either been resolved or I have a plan to resolve. I'm guess that threw a lot of people off the property. 

10% Cap is my sense for this type of property in this location. Nearby markets are closer to 6% but this is a tougher town. Not a "war zone" by any means, but a real working class area.

Jake, I’m in a similar position. Waiting to hear back from the appraiser on the valuation of my property that we’re trying to close on. I plan to make some changes and increase the value of the property (4 houses on one parcel) and refinance 24 months from now. MTF. 

Originally posted by @Jake Marin :

Thanks @Todd Dexheimer and @Oleg Shalumov ! I was hoping that it would be possible to skip the refinancing step by structuring the loan around the ARV since the current value is so much more than the purchase price but the lender shot that idea down firmly.

Have you ever heard of 100% financing on commercial loans based on an appraised value that is significantly higher than the actual purchase price? 

Yes, I have gotten 100% financing on commercial loans, but it rate to get that up front. I’ve gotten it 2 times. Both times the appraised as is value came in roughly double the purchase price. I would not count on it though 

@Jake Marin

Use a bridge or hard money lender to acquire and stabilize. Refinance with a traditional lender for permanent financing at a lower rate. This is what most commercial real estate investors do, and is the predominant strategy employed.

So upfront you’ll need cash but on the refi you can get all of your cash back and then more. Some lenders will limit to 90% of total cost on the refi so shop around or use a mortgage broker.

Most commercial loans are done with mortgage bankers, which can be thought of as kind of a hybrid between a broker and direct lender.

Problem you’ll have is loan size, I personally rarely do loans under $1m and that’s true for most lenders/brokers. Search for the local credit unions and small regional banks.