Board Topic: Refinancing rental property
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Refinancing rental property

Posted by: susiebh Oct 27 2003, 04:03 PM
We have purchased, for cash, an old municipal building that we plan to renovate and rent to small businesses (property is currently zoned commercial.) Where can we go to get a loan to refinance the cost of the building and add $50,000 for renovation costs? We don't know where to look as our local bank does not lend for this purpose. We also need to know what the going rate is. Any info will be welcome.

Posted by: loanuniverse Oct 27 2003, 08:12 PM

in response to your questions...

Where can we go to get a loan to refinance the cost of the building and add $50,000 for renovation costs?

I wish I could tell you where to look in order to get this kind of financing, but I see problems getting this kind of deal funded by any commercial bank. Taking into consideration that a banker will be looking at two main things: Repayment capability and loan to value This request will probably have trouble meeting either.

The first weakness will be the repayment capability. After all, chances are that the property will be vacant during the duration of the renovations and would gradually stabilize towards full occupancy. How is the loan going to get paid during this time? While banks do this kind of financing through “construction lending” the experience of the developer is one of the most important factors when considering this type of request.

The loan to value is another problem. You are requesting a loan for 100% value of the property {purchase price} and want to add the renovation expenses. Commercial banks will not go any higher than 75% and sometimes 80% on these types of properties.

Right about now you must be thinking: “I already knew that the bank wasn’t going to lend me the money, why doesn’t he tell me something that I don’t know”

Well, we are a little impatient aren’t we?

I am going to be honest and admit that I am having a bit of trouble recommending some course of action. From my experience in commercial lending from the point of view of community banks, I can’t figure how to do it the way you are proposing. I am also sure that there are outfits out there that are not banks and therefore are not constrained by having to show repayment or a loan to value that conforms to policy, but I do not know of any names off the top of my head. Having said that, and after reminding you to read my disclaimer, how about doing the financing in steps.

- Assuming that you need only the money to fund the renovations. Could you get financing just for that portion?

I mean getting the loan for the purchase price and the renovation is not available to you at this time, but $50,000 is a more achievable number. Could you get a loan secured by the property to fund renovations? Could you access some other resources in order to fund the renovations? Your personal income could be used as the source of repayment for this loan.

The goal here is to allow for the renovation and leasing of the building and then come back to the bank and negotiate from a much better position. The loan at that time becomes a regular refinancing subject to the constraints of a regular commercial real estate loan. The following is a summary of those constraints as of today’s date:

-Maturity of 5 to 10 years. Possibly 15 in some cases.
-Rate of 5% to 6% if you allow for repricing, if the bank offers a fixed 15 year special then you are looking for a slightly higher rate.
-75% of appraised value.
-Debt service coverage of at least 1.25X

There is a lot of information on the site already about refinancing income producing property so feel free to browse. This idea is an educated guess, the best solution to your financial needs can only be plotted by having access to all of the pertinent information including what resources can be tapped.

Nevertheless, I hope this helped some.

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