Having Trouble Refinancing 4plex (our first investment property)

25 Replies

Hey BP!

     So, my wife and I purchased our first investment property in May of 2017 (a 4plex). We comepletely renovated one unit and moved into that one unit. We've increased rents on 2 of the other 3 units and soon to be all 3 of the other units. We just recently found out that we are pregnant with TWINS. This has changed our strategy moving forward for investing. We now are in need of a bigger house for us to purchase so we can fit our 4 kids and 2 dogs. My plan was to refinance our 4plex so that we could use some of the equity to put towards our next house. I was also hoping to do some updates to our next house to build some equity with that property. But, I'm having trouble refinancing the 4plex. I'm still new to investing, but I've been told that on a multifamily property you are only able to borrow up to 70% of the total value. Because we purchased the 4plex as a Owner Occupancy...we only put down 5%. 

When we purchased the 4plex it appraised at $383k and that was our purchase price. We financed around $363k. However, we completely renovated one unit, made exterior updates and small updates to other units (paint & a/c work), increased rents, and the neighborhood has undergone some big positive changes. A new huge hospital was built just blocks away, new developments with commercial buildings and gas stations around the corner, other multifamily properties have sold 500K+), duplexes have sold 300K+, and also just a few streets over there have been some higher end condos built and sold. I have no had an official reappraisal done on the property, but I think the property will appraise for AT LEAST 450k, but I think higher. 

Any advice is greatly appreciated.

I'm not sure who told you the 70% rule for refinancing on a multifamily, but I'd definitely talk to other banks/lenders about getting a higher LTV on the property for the refi. Credit unions are a good place to start as they can be more flexible in their underwriting.

@Michael Breedlove

To refinance using conventional financing for what is now an investment property, a 4 unit is capped at 70%.  Google "Fannie Mae Eligibility matrix" and you'll see the chart if you scroll down.

Now, here's the hard part. Slow down. If you have some patience, try refinancing as an owner occupied property now that you're past the seasoning requirement. If the value is 450K and the mortgage is 363K, you're really close to getting rid of mortgage insurance. A year from now (I heard you, your wife's pregnant), buy another property that's better suited to your new addition with FHA so you don't have to come out of pocket with too much money and let the 4 unit pay for itself.

I guess what I'm saying is don't throw away a beautiful opportunity to have a 4 unit investor property that's appreciating and will obviously pay for itself over time.  If there's no nursery to paint in the apartment, put the baby in the living room for a couple months while you shop for a new home (the baby won't know:).  You can have the baby and live in an apartment for just a little longer and enjoy some great returns later.  Just have patience.

Stephanie

@Michael Breedlove If you are doing a cash-out refi, you are limited to 75% as owner occupied or 70% as investment.

I would agree with @Stephanie P. with one caveat. If you buy the new primary with a FHA and that property is within 100 miles of the 4-unit property you are moving out off, then you will not be able to use the rental income from the 4-unit to qualify for the purchase. You will have to have enough income to be able to qualify for the new purchase loan and be able to carry the 4-unit loan.

@Upen Patel correct me if I'm wrong, but I'm pretty sure the 100 mile rule ONLY applies if you're moving from one FHA-loan property to another, which is why @Stephanie P. recommended they refinance into a conventional loan before moving. With a conventional loan on the 4-plex they shouldn't have a problem getting an FHA loan on another property that takes into account the 4-plex rental income.

@Stephanie P. @David Cruice @Upen Patel @Kevin S. Thanks so much for taking the time to reply. Let me clarify. Currently, we owner occupy the 4plex and have a conventional loan for that property. It is looking like refinancing is not going to be an option for us. I’m going to have to find another way to get some extra money for downpayment and purchasing a bigger vehicle to fit our family. But, we should be able to qualIfy for another conventIonal loan and purchase somethIng more move In ready. A total of 4 kIds under 4 (IncludIng newborn TWINS), along wIth 2 dogs, & 2 adults is going to be pretty cramped where we are currently.
Originally posted by @Michael Breedlove :
@Stephanie Potter @David Cruice @Upen Patel @Kevin S.

Thanks so much for taking the time to reply. Let me clarify. Currently, we owner occupy the 4plex and have a conventional loan for that property.

It is looking like refinancing is not going to be an option for us. I’m going to have to find another way to get some extra money for downpayment and purchasing a bigger vehicle to fit our family. But, we should be able to qualIfy for another conventIonal loan and purchase somethIng more move In ready. A total of 4 kIds under 4 (IncludIng newborn TWINS), along wIth 2 dogs, & 2 adults is going to be pretty cramped where we are currently.

 Thanks for the clarification.

First, congratulations on newborn twins.  I can't imagine (even though I had 4 in diapers at the same time).

The reason I suggested the steps I did in the earlier post is to maximize government and conventional guidelines and programs. If the property appraises at 500K, that's a 375K loan amount. If your payoff is 363K, that leaves you 12K for closing costs and gets you about 8K in cash out if you get a little rebate pricing to pay for those closing costs. Then if you use FHA to purchase your next house, the down payment is only 3.5%. Not sure of the size of the purchase, but on a 250K house, that's $8750. The seller can contribute up to 6% toward non recurring closing costs, so essentially you're coming to the table with about 10K. If you already got 8K from the original house, you're coming up with 2K for your new house.

Guys like @Upen Patel are really the experts in conventional financing and FHA (we don't do them here at US Commercial), but I'm pretty sure it could work and you'd get to keep a profitable 4 unit that doesn't have mortgage insurance and you'd be able to parlay some cash from that one into a house that fits your growing family.

I don't know your situation completely and I could be way off base, but in cases like these over the course of my life, patience, good counsel and then action have  worked for me and mine.  Again, congratulations on the newest additions.  Truly God's blessings

Stephanie

Originally posted by @Kevin S. :

@Upen Patel correct me if I'm wrong, but I'm pretty sure the 100 mile rule ONLY applies if you're moving from one FHA-loan property to another, which is why @Stephanie P. recommended they refinance into a conventional loan before moving. With a conventional loan on the 4-plex they shouldn't have a problem getting an FHA loan on another property that takes into account the 4-plex rental income.

The 100 might rule applies if the new purchase loan is an FHA loan, irrespective of the type of financing you have on the property you are exiting.

Generally speaking you can only have 1(one) FHA loan at any given time. So moving from a FHA to FHA wouldn't really work in the 1st place.

Originally posted by @Upen Patel :
Originally posted by @Kevin S.:

@Upen Patel correct me if I'm wrong, but I'm pretty sure the 100 mile rule ONLY applies if you're moving from one FHA-loan property to another, which is why @Stephanie Potter recommended they refinance into a conventional loan before moving. With a conventional loan on the 4-plex they shouldn't have a problem getting an FHA loan on another property that takes into account the 4-plex rental income.

The 100 might rule applies if the new purchase loan is an FHA loan, irrespective of the type of financing you have on the property you are exiting.

Generally speaking you can only have 1(one) FHA loan at any given time. So moving from a FHA to FHA wouldn't really work in the 1st place.

 Isn't the change in family size a mitigating factor?

@Stephanie P. thanks so much for all of the input. And thanks as well for the congrats! We definitely know the twins and all of our kids are a blessing from the Lord! And He’s going to provide the right home for us too!! 

@Stephanie P. .  I think slowing down is a great suggestion.  Couple’s that are pregnant has the urgency to move up in RE which often times end up to be not their best investments.  Many families in other parts of the world such as Hong Kong or Japan are gracious to have a 2 bedroom place for their family of 4.  Babies don’t need a lot of room yet until they start running around.  I would just assess and see if there are anything in the apartment that could use some decluttering.  It seems like you have many factors in planning your next house hack, location, schools, profitability etc.  Congrats! 

@Michael Breedlove SomethIng else you might want to consIder instead of buying your next property why not rent until you have enough equity on your Multi if you really need to move to a bigger place.. I see the other responses and yes I do agree if you can stay in your current home as long as possible it probably makes the most financial sense but if the wife wants a bigger home for the family, what’s the old saying happy wife is a happy home I totally understand.. I have consider renting myself but when I bring it up to my partner she’s not thrilled about the idea she sees it as a step back I personally don’t..

@Raul R. great suggestion. Thanks for posting. It is something I have considered as an option. Renting a house the size we would need in our area would not be a cheap decision. And if we move out of our 4plex and have that 4th unit rented, the total income could certainly apply towards a second mortgage while still being able to set money aside for capex,  vacancies, repairs, etc. So, we are looking at houses and just may not be able to do all of the renovations that we would prefer to do immediately. But, may look to purchase something that she move in ready that we could do update soon little by little while living there over time. And then in 3-5 years sell the single family house and continue to pursue our real estate goals! 

@Angela Yan thanks for the comment. The main need for space is not necessarily for the babies themselves but for all of the things that come with having twins along with 2 toddlers and 2 medium size dogs. And the apartment style living is not ideal for a family our size either. Sharing a yard, having tenants above you walking around at 3am and sliding chairs around while you’re trying to sleep, not enough parking for guests, etc. But, you’re right, there may be areas we can declutter some things and we certainly don’t want to rush and make an unwise decision. 

@Michael Breedlove ..we also “House hacked” our 4 Plex and just refinanced from fha to conventional with 75% Loan to value, this past May. So now we are able to use fha again. The only caveat to this is that we refinanced as owner occupied so now it’s like starting over and we have to occupy the unit for another year, unless we have extenuating circumstances ie. newborn, job relocating So If your looking yo purchase again soon after refinancing i would refi as investment 70% ltv. just something to keep in mind

@Michael Breedlove Congrats on the twins! And congrats on the forced equity into your property - well done! You have gotten a lot of great advice on here already - let me just affirm it. As hard as it feels - slow down a bit. Get to a place where you can get that down payment together - and do it the old fashioned way. Refinancing can be the right move often - but not always. Sounds like @Stephanie P. got it right here. Or... hustle harder to make up that 8-10k for a down payment you'll need without a refi.

Let that 4plex do the work for you - over the long term (or at least 7-10 years)! We haven't had the swings in home values up here in Alaska (no crash in 08-09 - and no real run up since either) - so for us - 10-20 years has been a steady increase in values - and I am sure - over the course of 10-20 years - the same is true down where y'all are!

@Michael Breedlove , lots of good advice on options for refinancing? I’ll just throw out another option. Have you looked at getting a HELOC on your current 4plex rather than refInancIng? Our local bank does HELOC’s on primary residences up to a 90% total LTV. Roughly 5% interest (though variable), and interest only payments for the first 10 years. Also, no closing costs or origination fees. So, back of the napkin math: 450,000 x 90%=405,000 405,000 - 363,000=42,000 Max HELOC amount AddItIonal interest-only monthly payment: $175 It has worked well for us. Happy to share any other details from our experIences.

I firmly believe that the 1st step is always a 800 FICO and seasoned LLC in your back pocket with lot's of business credit. That will open you up to all kinds of financing from business loans to commercial financing to corporate credit loans to hard money to mortgages, etc. Play each lender against each other by sharing offers and pick the lowest cost for you. This also assumes that you are OK with a personal guarantee and placing your own personal assets at risk.

@Michael Breedlove I would hold off on the refinance. Here is why. Come may 2019 you will have “2 years as a landlord”. You will now be able to use the income from the first property toward buying a second because banks now look at you as an “experienced landlord”. They then are likely to have more flexAble debt to income requirements. That’s what I just did a year ago here in Alaska. I just house hacked my way into a second 4plex. The bank gave me up to 67% DTI ratio. The problem with refinancing an investment property banks Want you to have skin in the game if your not going to live there. So they only refinance to a certain percentage. *** refinancing as an owner occupant basically limits your ability to buy as an owner occupant for one whole year. Unless you have a qualifying reason. So my suggestion is to leave the financing the same on the first 4plex and house hack into another property. With owner occupant financing. You can time it to close after may 2019 and you will be able you count the rental income from your 4 units towards buying your second property. You can do anything 1-4 units with the second property. Obviously the right 4 unit property would would actually help your month to month cash flow. I now own 2 - 4plexes in Alaska. I live for free in one 3BR 2.5BA 2 car Garage unit/house. I also make $1200/month after all rental expenses. Feel free to message me and I’ll give you my contact info if you would like to talk more about what options you have.

@Tyler Wehrli man I appreciate you taking the time to comment. It does look like we are going to be able to get a conventional loan for a second property and we are going to hustle hard to get enough money for the downpayment on a SFR property. We'll move out of the 4plex and rent out our unit as well and get max market value rent bc it's been completely renovated. And in a few years, we'll be able to refinance the 4plex and be in a good position to continue our pursuit of financial freedom through real estate!

I appreciate the knowledge and I’m very grateful for those like yourself with more experienced and wisdom who are willing to share with others like myself! 

@Michael Breedlove , First, my apologies.  It appears the mobile app stripped out all my formatting on the last post, so the numbers all bled together.

While I'd call your local banks, yes. At our bank, 1-4 units could get a "normal" SFR HELOC on them. The big thing is being owner occupied. Most lenders will only do HELOC's on your primary home. However, you can move and keep the HELOC in place after you've moved out. Calling around to our local banks, their terms were all similar, but there were definitely differences between banks that offered HELOCs and banks that were actively promoting them.  The one we got did not charge for the appraisal and had no annual fees.  The only fee that would possibly apply was a $400 charge for the bank to recoup the appraisal costs if we closed the line of credit within two years.  

So, from my perspective, even if you'd rather save up cash for the down payment on your next home, I think it'd be worth checking into a HELOC just so you could get it in place while you're still at the 4-plex.

We used ours to buy our next triplex. We did the BRRRR strategy and then paid off the HELOC after doing a cash-out refinance on the triplex. One other benefit that we learned along the way is that HELOCs have no seasoning period. So, even if you use another line of credit, or a balance transfer from a 0% credit card to pay the HELOC down, you can immediately turn around and use the HELOC funds for a down payment on a conventional mortgage.