Is this a Viable Strategy with Commercial Property?

[Greg P.]

Hello, I am currently in the Residential business, but thinking about going into Commercial for time being. It makes the most sense with the economies of scale. So, lets say I was able to locate a a decent retail or apartment with some value add play and I was to use my private lender to fund the deal; would I be able to refinance with a local bank as long as the income from the property was able to support the debt? Thank you.

[Joel Owens]

Greg it will depend on the portfolio of the bank and how many performing versus non - performing assets on the books.The bank might not want to refi that type of product with too much of that type of asset class non-performing on the books already.

They might have too much defaulted commercial all together.

For value add plays typically occupancy is an issue.The lenders will want certain occupancy levels obtained for at least 3 months depending on loan type and typically stabilized for 6 months to a year or longer.

If you buy an apartment building at say 50% occupancy using a hard money lender or private money and the going vacancy rate is an average of 10% then the lender wants 90% occupancy averaged out over time.

When you refi you will only be able to go up to a certain percentage to cash out or can just convert with no cash out to the lower interest rate.

Regular banks do not lend usually on sub par occupancy levels for the area.They see it as too risky and the say 60% occupancy can quickly go to 30 or 40% and they have a foreclosure or short sale on their hands taking a loss,plus inspection reports,attorney fees,appraisal and environmental review etc.