By Terry Painter/Mortgage Banker
Author of “The Encyclopedia of Commercial Real Estate Advice”, Published by Wiley
This article tells you what it takes to get a commercial loan refinance with cash-out, and the guidelines for 8 loan programs.
Commercial loan refinance programs with cash-out are Fannie Mae at 75% LTV, Freddie Mac at 80% LTV and HUD/FHA at 80% LTV. CMBS, and Debt Fund Lenders go to 75% LTV. Commercial Banks do not like cash out and usually only go to 65% LTV.
Buy, Improve, Raise Value, Refinance, Repeat
You lay awake one night hashing out a plan to buy and improve the right commercial property. This will firmly put you on the path to becoming very comfortable financially. You are going to buy the right property in the right place at the right price. Next, you improve it so you can raise the rents which will raise its value. The payoff is a cash-out refinance which will allow you to invest your profit into buying another income producing property. You repeat this over and over, smiling each time on your way to the bank to deposit the cash from your refinance. It will not stay in the bank for long, as you will soon be reinvesting your profits in purchasing another commercial investment property. Boy, are you going to have fun watching your net income and net worth skyrocket throughout your future.
Your offer is accepted on a solid C Class 24-unit apartment complex for 2.4 million dollars. You know you can’t go wrong because this is one of the best neighborhoods in Atlanta. After closing, you put in new floor coverings, fixtures, appliances and counter tops. It costs you $6,000 per unit. In 12 months, all the rents are raised by $150 per month which raises the property value by 20%. Now it appraises for $2,880,000. Wow! This gives you a gross profit of $480,000 and a net profit of $336,000 after subtracting the cost of the renovations. Now comes the best part. You plan to keep your cake and eat it too. After all, you will not be selling your renovated property. You will be keeping it and doing a cash-out refinance on I—pulling out most of your equity and investing that cash in another commercial investment property. Will this be easy? Can you get a commercial refinance loan that will give you that much cash out that fast?
Not likely in 12 months. Lenders just don’t like you to grow your wealth that fast. In my book “The Encyclopedia of Commercial Real Estate Advice”, I go into detail on cash out refinancing parameters. Commercial banks want you to wait at least 3 years before pulling cash out based on appraised value. And then they will likely only do a cash out refinance up to 65% LTV. Fannie Mae, Freddie Mac, HUD, CMBS, which do 75 – 80% cash out refinances prefer you to wait 2 years to pull maximum cash-out based on a new appraised value. Otherwise after a year they will only lend you 75 – 80% of what you paid for the property plus what you put into it. Here are the top commercial loan refinance programs with cash out guidelines available in the United States:
Commercial Loan Refinance Cash Out Programs and Guidelines
Community Banks – As mentioned, most dislike cash-out for any reason except improving the subject property. After 3 years they will do a maximum 65% of appraised value refinance with cash-out. Before 3 years they will only lend you 65% of what you paid for the property and what you put into it.
Regional Banks – These are capital divisions of banks. They can lend up to 75% of appraised value on a cash-out refinance after 3 years. After 2 years of ownership they will lend you up to 80% of what you paid for the property and what you put into it to improve it.
Credit Unions – After 3 years of ownership, most will lend on a cash-out refinance 75% of what the property appraises for. After 2 years many will lend up to 90% of what you paid for the property and what you put into it.
Life Companies – After 3 years of ownership many will lend up to 90% of what you paid for the property plus what you put into it, or 70% loan to appraised value whichever is less.
HUD/FHA – For multifamily only – after 2 years of ownership they will lend up to 80% of appraised value, or 80 – 90% LTV case by case.
Fannie Mae – For multifamily only - up to 75% of appraised value for cash-out refinances after 2 years of ownership, or up to 80% of what you paid for the property plus what you put into it before that.
Freddie Mac – For multifamily only – up to 75% of appraised value with cash-out after one year of ownership. This is the most liberal low rate commercial loan cash out refinance programs.
Debt Fund Lenders – These are more expensive loan programs. They can lend up to 75% of appraised value after the renovations are completed even if this occurs in less than a year.
By Terry Painter/Mortgage Banker President of Apartment Loan Store and Business Loan Store. Member of the Forbes Real Estate Council