I recently purchased a 4-plex at $640K, with financing though a residential loan. It was appraised at $647.5K based on the gross monthly rent of $3500 multiplied by the Gross Rental Multiplier of 185. We recently added a 5th unit, renovated the house, and had it zoned with the city as a commercial 5-plex. After the renovations and adding the 5th unit, we are getting monthly rents of $5,600. If I use the same Gross Rent Multiplier of 185, that puts the value of the home now at $1,036K.
1. Is my math right on this? Will a commercial appraisal follow this same formula for the value?
2. How do I go about refinancing the home on a commercial loan so that we can pull out some of this new equity and continue the BRRRR method?
In my experience, banks will recognize the value of the property by using the NOI and the cap rate of the property. They will of course send out an appraiser before finalizing the loan and that is what they will consider the ultimate value to be. They will also be interested in the debt service coverage ratio (DSCR) with the new proposed debt servicing. They want to see 1.25x+ (higher the better for the bank). For example; if the annual debt service is $100k on a property and the net operating income is $125k; it indicates the NOI covers the debt service 1.25 times or typically shown as 1.25x.
Chandler, AZ · Member since 2018 · 2 posts · 0 votes
5y
You could definitely get a commercial loan for this but since it's a small balance, your rate may not be better than what you currently have. However, a commercial loan would remove a residential loan from your credit. I don't know your property expenses but you would take your gross of $5600 subtract your expenses to get to your NOI so let's say that's 50% in this example. you would have $2800/ mo NOI. multiply this by 12 to arrive at $33,200 and divide it by a cap rate of say 5% and your value would come out to $664,000. Be very careful when giving yourself a cap rate. A lower cap rate will give you a higher value but cap rates of 2 or 3% are typically found in large A-class multi-family. If you need help or want to see what rates and terms would look like, I'm happy to help you.