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Mike MoseePro Member
Investor · Eagle Point, OR · Member since 2011 · 184 posts · 122 votes

Hi BP

Have a 10 unit apartment in Tennessee worth $800k with mortgage of $380k.  Original mortgage holder note prohibits refi without prepayment penalty for four more years.  How can I tap equity for additional purchases?

Thanks for input

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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
2d

Does the first mortgage allow you to get a line of credit? How much is the prepayment penalty? It might be worth paying it unless it's 3 or 4 points.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2d

    Does the first mortgage allow you to get a line of credit? How much is the prepayment penalty? It might be worth paying it unless it's 3 or 4 points.

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  • Hossein Sharifi
    Investor · Member since 2023 · 93 posts · 42 votes
    2d

    Chris is asking the right first question: what kind of prepay is it? A step-down like 4-3-2-1% is very different from yield maintenance or defeasance. On a $380k balance, 4% is about $15k. A cash-out refi at 75% of $800k is $600k, so you'd net roughly $205k after paying off the note and the penalty, before closing costs. Paying $15k to unlock $200k is usually fine.

    Yield maintenance on a low-rate note can cost several times that, and that's when other routes make sense: a second-position loan or line from a local bank (read the note first, since some ban junior liens), or pledging the building as extra collateral on the next purchase so you bring less cash. And since your title says 1031, selling and exchanging triggers the same penalty, so price it the same way.

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  • Juan YepesBusiness Member
    Lender · Miami, FL · Member since 2025 · 127 posts · 35 votes
    2d

    @Mike Mosee even if the prepayment penalty is step down (5%-4%-3%-2%-1%), with four years left, you’re still at the high end of the prepayment cost to refinance.

    Instead of refinancing, look into adding a 2nd lien mortgage or HELOC to tap into the equity without affecting the 1st lien mortgage.

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  • Nyisha Walton
    Lender · Houston, TX · Member since 2026 · 30 posts · 7 votes
    2d

    Hey Mike, with that much equity and a prepay you don't want to trigger, a second-position loan on the building is usually the cleanest way to free up funding without touching your first. Do you know if your note allows a junior lien? If it does, we fund investment properties in 30+ states, Tennessee multifamily included, and I'm happy to run rough numbers for your next purchase.

    1Reply
  • Aaron Zucker
    Realtor · New York, NY · Member since 2019 · 39 posts · 10 votes
    2d

    Mike — good position to be in, roughly half equity and a rate worth protecting. Two practical points before you shop the second lien:

    First, read the existing note and mortgage for language on additional encumbrances. A lot of small-balance commercial notes require the holder's written consent for a junior lien, or treat one as an event of default. If consent is needed, go to the current holder first anyway — private and local holders will often do a second note secured by the same property, or a separate loan cross-collateralized with it, faster and cheaper than a new lender who has to underwrite around them.

    Second, underwrite the combined picture, not just whether someone will lend it. After a second-position payment, does the 10-unit still cover at a healthy margin, and does the property you're buying cash flow at today's rates without counting on a refi later? The deals this money should fund are the ones that work even if rates stay where they are.

    If the holder won't consent and the penalty math doesn't work, seller-financed purchases are the other way to keep growing without touching this loan at all. Four years passes quickly if you're still acquiring in the meantime.

    1Reply
  • Adam Summerer
    Lender · Franklin, TN · Member since 2026 · 90 posts · 19 votes
    2d

    If the first note has four years of prepay left, the cleanest path is usually a second lien that leaves that loan alone instead of refinancing it. Some private and DSCR desks will do a subordinate loan against the equity so you don't trigger the PPP, just get the combined LTV and their min loan size in writing first. On a 10-unit, skip anything marketed as 1-4 second-lien DSCR, that product usually won't fit, and price the second's rate against what the prepay would actually cost if you just ate it.

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  • Mike MoseePro Member
    OP
    Investor · Eagle Point, OR · Member since 2011 · 184 posts · 122 votes
    2d

    Thee is no prepay on the loan note. Just tired of apartment turnover compared to SFRs. The thought is to turn the $800k estimated value into 10 SFRs on a 1031, but will need to

    A. Payoff current note, $300k

    B. Find financing on the subject properties

    C. What are road blocks to accomplicing this strategy?

    Thanks for replies

    0Reply
    • Adam Summerer
      Lender · Franklin, TN · Member since 2026 · 90 posts · 19 votes
      2d

      Ah got it, my bad on the prepay, I misread that. Then A is the easy part, the $300k just gets paid off out of proceeds at the sale closing. For B, 10 SFRs usually means DSCR or a portfolio/blanket loan, since conventional caps you at 10 financed properties total and underwrites every one on your personal DTI. The real roadblocks for C: to defer it all you need to buy at least what you sell for and replace the $300k of debt, ID'ing 10 properties means using the 200% rule instead of the 3-property rule, and closing 10 deals inside 180 days is the part that bites people, so get the financing lined up before you list. Happy to talk through the numbers if you want to shoot me a DM.

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  • Jiao Liu
    Lender · Houston, TX · Member since 2026 · 39 posts · 10 votes
    1d

    Hi Mike — I can handle the financing for the SFR purchases. I do both single-property DSCR loans and portfolio loans, so we can price it both ways and go with whichever comes out better.

    To get real numbers started: what price range per house, what rent do you expect on each, and are you buying in an LLC or personally? Your credit score range helps too.

    Send me those and I'll run it.

    — Jiao

    0Reply
  • Matthew MorrowBusiness Member
    Investor · PA - NY - NJ · Member since 2019 · 600 posts · 207 votes
    1d

    @Mike Mosee Get the exact penalty math from your lender first. Sometimes paying the penalty costs less than waiting, sometimes it doesn't. We've had clients get burned jumping into a larger asset just for growth, where the ROI ended up lower, all to pay less in taxes. It's like buying a car you don't need just for the write-off. Have your CPA and a qualified intermediary dig deep with you before you make any move. If you do go that way, line up the replacement deal first and build some flexibility into it, because there's no guarantee your existing building sells on your timeline either, unless you've already got a buyer lined up. Good luck with it.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1d

    @Mike Mosee , From the 1031 perspective this is what's called a diversification exchange (going from one larger asset to multiple smaller ones. They're not hard to do at all. But since this thread is primarily about the financing side here's a tip that can help your strategy greatly:

    The requirement to defer all tax in the 1031 exchange is that you purchase at least as much as your net sale (let's say roughly $780K) and use all of your net proceeds (again lets say $400K) in the purchase or purchases.

    A strategy that will give you more time to relax and find the perfect replacements would be to buy one $300K property for cash. Then use the remaining proceeds to buy two $250K properties using 20% down on each. If you do this you've completely satisfied the 1031. But the short time lines were less impactful on you since you were only buying 3 properties initially. And you've now got a lot of captive equity in the cash property that you can access at any time as the next targets are identified by you. But you're not under the gun to find them.

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  • Shelo Roman
    Member since 2026 · 1 post · 0 votes
    18h

    Boynton beach

    0Reply
  • Valentina Dalia
    Lender · 699 14th St NW, WA · Member since 2026 · 4 posts · 0 votes
    17h

    Hello,

    With an estimated value of $800,000 and a mortgage balance of approximately $380,000, you have significant equity in ownership. However, since the current loan still has an early repayment penalty period, immediate refinancing may not be the most advantageous solution.

    In particular, you could examine the possibilities of a line of credit secured by the property, a loan on equity or additional financing, subject to the conditions of the lender and your capacity to debt.

    I recommend that you compare the total cost of each option, including interest, financing fees and any penalties, with the expected return on the next investment. A broker specializing in commercial real estate could also help you determine the most suitable structure.

    Good luck in your acquisitions.

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