Investor · Honolulu, HI · Member since 2020 · 3 posts · 2 votes
Hi all! Question for the BP community.
Say i'm purchasing a small multi-family investment property for $1,000,000. I'm putting a downpayment @ 20% using a HELOC. Im funding the remaining $800,000 using a private money lender @ 5% interest rate with 2 points for a 30year loan. I plan to fix up this property to increase the ARV. Is there a way to refinance so I can take out my initial down payment to pay back my HELOC while also locking up a better interest rate for a 30 year loan to take advantage of the current low interest rates?
Lender · Renton, WA · Member since 2018 · 215 posts · 216 votes
4y
I assume this is a 2-4 unit multi-family? If so, then a conventional refinance would be subject to some sort of seasoning of the increased rents after rehab and the pricing and rate will be higher for a cash-out refi versus a rate and term. If its a 5+ unit, then you would be refinancing with a commercial loan and that doesn't typically have pricing differences with a cash-out vs rate and term, and the ARV would largely be determined on the increase in rents (DSCR) rather than market approach, which you likely knew already since you are an appraiser. If you are looking to do a rate and term conventional refi and you have a really good relationship with your private lender, maybe you could work something out to have a higher loan amount placed on the deed of trust/mortgage to include your 200K out of pocket or a partial amount, so that you have a stronger chance to pull out the money you have put into the deal without being dinged for a cash-out.
Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
4y
HI Wyatt,
An important consideration based on the above that you've mentioned is that you're using 20% down equity from your current HELOC from another property and that you're borrowing 80% LTV from a PML or private money lender. So in essence this is 100% CLTV or combined loan to value from a lenders eyes.
If you were to live in this property you would need an appraisal of 1.33M ARV or future appraisal, because owner occupied cash out on a 2-4 unit property is 75% conventional financing wise (you might be able to find a bit higher with commercial local banks or private lenders in this forum).
The formula works like this since you have outstanding 1M in loans:
1,000,000 / .75 = 1.33M or 1,333,333
the key to take away from this for future rule of thumb is the 1.33 X factor when you need to meet a 75% LTV.
This means that if you appraise for 1.33M or higher and you apply for a 75% cash out refinance you could in theory get all of your original basis or capital back. (With this 1 Mil you can payoff your PML to rinse and repeat and you get to pay down your HELOC back down).
The factor for appraisal becomes higher if you dont plan to live in this property. As an investment property the max is 70% LTV conventional financing wise so 1M / .70 is 1.42X factor meaning you'll need an appraisal min or ARV (after repair value) of atleast 1,420,000 roughly to get all of your original 1M out.
The above doesn’t even factor in all of your rehab money you’ll have to put in to force or create all this equity (unless you’re lucky enough to get this 300-400k of equity for free via market appreciation).
Those are some thoughts I’d have when reviewing the above scenario, hope that helps.