Multifamily Financing: What is the best option?

Question

Hey BP,

About 9 months ago I purchased a dilapidated 7-plex in Maryville, MO (north of Kansas City, MO) and have been in the process of rehabbing the property. I financed the rehab through a construction loan with a local lender. I am now beginning to discuss end-financing. My options through this local bank are either a 20, 25, or 30 year 5-1 arm all at 5.25%. I am leaning towards doing the 30 year in order to increase the cashflow. I also tentatively plan to refinance in roughly 2 years in order to pull my initial investment out of it (BRRRR strategy with a slower refinance). Is this good thinking? Is there better options out there? Thoughts?

Grateful,

Matt

Jonathan A. · Answer

@Matt Crawford Thanks for this info matt. How did that sevenplex going? any update?

Jonathan A. · Answer

@Matt Crawford

Hey Matt

Congrats on your first rehab. ME and my team are just in contract with apartment building in Kansas City, MO. We would have a full major rehab as the property we acquired is a fire sale. May i know where u got your construction loan? Thanks Matt

Matt Crawford · Answer

@Greg Downey - great questions.

1.) While the property is still being rehabbed (should be finished within the next 3 weeks God-willing), I marketed it for rent back in December and have 6 out 7 units rented. This is my first project - talking with a seasoned property manager in town and several others, they think I'm too low on rent.

2.) Good thoughts. I was just under the impression that since the value of the property hinges on the NOI (being 5+ units), I would need some proven history to document the actual expenses. I'm hearing you say that this is not necessarily true.

Greg Downey · Answer

@Matt Crawford - Just a couple of thoughts...

1. If it is newly renovated, why are the rents lower than market?

2. Knowing a bit about the KC area (I'm just South of you in SGF) I know that your ARV isn't going to be $1,250,000 or greater so agency-type loans are off of the table.  Typically you don't need 1-2 years of stabilized funds for a newly rehabbed property that is fully occupied with annual leases at market rents (see question above).  Your interest rate would most likely be higher but AMMO over 30yrs.  The main thing is that you could get your money back faster.

Like I said, just some thoughts.

Matt Crawford · Answer

@Greg Downey - Technically just one refinance. I also borrowed 80% of the purchase price from this local lender. When I have made my final draw on the construction loan, we will set the terms of the loan (what I am seeking advice on).

Since this property has a major rehab and sat vacant for several years prior, there is no data to present regarding the NOI... I believe I am about $200-$300 low on my rents all 7 units combined as well. I plan to raise the rents over the next year with hopes of raising the appraised value. Is there a faster way to prove NOI without waiting for a year or two to build a history?

Greg Downey · Answer

@Matt Crawford, Are you planning on doing 2 refinances or will your construction loan carry you to the 2 year refinance mark?

If you were planning on waiting, why?