I'm starting this thread to get a better understanding on the limitations of refinancing out of private money.. I'm very close to making my first deal and through a fortunate connection I have found someone willing to lend money at a generous rate. However, I feel I need to be more comfortable with the refinancing strategy before I pull the trigger. So, to all of you who have done this, what was the conversation with the bank and the outcome? Keep in mind that I am younger (20), have no credit (not bad credit though, which obviously is worse), and this would be my first property. I'm concerned that whichever bank I go to would be hesitant to refinance because of my age/lack of experience, despite the fact that they would be refinancing a performing asset. I'd like to hear your opinions..
Here would be the numbers, and if you see a problem with my analysis, please tell me.
6 Unit, Purchase Price 290,000
Monthly rents - 4200
PI - 1738
Taxes - 491
Insurance - 266
Maintenance (using 10% of monthly rent, property is recently renovated) - 420
Vacancy - 420
Property Management - 420
Cash Flow - 267.00
Obviously the cash flow is very low for a 6 unit. However, I'm using this as an example. Let's say I refi'ed in a year at 4.5%, the cash flow would grow to $637.
Like I said, my concern is that I would have a hard time refinancing because of my situation. This was a deal I was considering, and I'm more than okay with a low cash flow until I refinance. Basically just looking for the communities thoughts. Thank you!
That's tough to say.
A 6 unit would be considered a commercial property and likely will have a higher interest rate as well as require a bigger downpayment.
Usually they want you to wait 6 months to refinance.
I don't think you will get a 4.5% interest rate unless you have excellent credit as well as a good percentage of money down on the loan.
They will probably want you to have at least 2 years at your current job and an average credit score. It wouldn't hurt to have at least 6 months of mortgage payments in the bank either. They will also likely want proof of income showing you can make the payments if it goes unrented.
As for finding that perfect bank. The best way is to simply call around and talk to all the banks near you and see which ones do commercial loans. It may take calling 40-80 banks.
The other thing to really consider and I see this overlooked quite a bit is to have a reserve emergency fund. Things break more often times than not in a house and more so in a larger multifamily. Have at least a few thousand set aside for those repairs as well. I can't tell you how many posts I have read where a furnace went out or a tree fell on the house, etc. Recently renovated doesn't mean much to me because things still break.
Thank you for your response. I agree with what you said, and that is my concern. Maybe using a six unit as an example was poor, but lets use a duplex as an example. Do you still think I would have the same problems?
Those same things will likely apply for a duplex as well. But you might find it a little easier to get a loan vs a commercial loan.
You will also need to show proof of all expenses, rent etc.
Basically everything about the property and what your cash flow is each month.
Proof of rent will need to be shown also.
They need to be able to see that it is making money and they will be paid back on time.
If you only make 30k a year for example they likely won't let you refinance on a 200k property.
If I were you I would go talk to a banker. They can give you free advice and give you a general idea of what they are looking for.
If you have no money in the bank, under 2 years at current job you may find it difficult. Not impossible though. You may consider just keeping the seller financing until you can build up a steady cash reserve.
I make twice that cash flow on a sfh with 1/6 that price tag. Be careful, private money is great, but make sure you use that wisely so you will have it for years to come. 267 on a 6 unit is not a good deal at all! 267 on a sfh would be ok. Also work on your credit. That will be your biggest hurdle by far.
In my area it's harder to find deals that cash flow that well, especially sfh. I'm aware 267 on that isn't a very good deal, it was more so to use as an example. And I'll start to focus on my credit, I understand that's probably the biggest way to alleviate these concerns
An easy way to do that is to google start building credit. Make get a few 500 dollar credits cards or whatever they tell you to do. I would highly encourage you to buy deals that make solid money versus buying deal that make marginal returns. Have you considered investing out of state? Partnering with someone out of state? Those would all be things to consider.
I wasn't going to share but I will. When I started a buy and hold side, I had a realtor tell me as long as rent covered the mortgage I would be ok. I almost threw up. There are bills that will come out of the woodwork for the most random things and with a marginal return, you will negative cash flow likely until it's paid off. Here is a great example for you. I bought two sfh for 25k and get 725 a month returns. That's what I mean when I say wait. You don't have to buy today, but when it makes sense to buy and make true passive cash. This is a business that if you make the wrong purchase it can be detrimental to any credit you are hoping to build.
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