How to Get Property Refinancing Right in an Uncertain Market
Whether you’re looking to lower your interest rate, reduce monthly payments, tap equity, adjust for completed renovations, extend the loan term, or simply keep up with an unprecedented and unpredictable market, refinancing your multi-family investment can be an attractive option.
There is more than one way to reach your refinance goals, however—and it isn’t always clear which approach is best.
Don’t worry, A&S Capital is here to give you a quick, concise breakdown of your options.
Before we get to our comparison of products, there are a few basics to keep in mind as you begin the process of gathering documentation and assessing options:
A solid credit score is more important in the current environment than ever.
Keep close watch on the Loan-to-Value (LTV) ratio, which often has a lower lending ceiling for multi-family than single-family properties.
The Debt Service Coverage Ratio (DSCR)—a property's net operating income divided by mortgage payment—is also key. The Corporate Finance Institute suggests a DSCR target of 1.2 to 2.
Ready to move forward with your refinance journey?
Here are three popular choices:
1.U.S. Department of Housing and Urban Development (HUD)
HUD loans often offer lower interest rates, longer repayment terms, and allow for higher LTV ratios, respectively. Additionally, if your original loan is a HUD loan, there is an internal refinancing program—HUD 223(a)(7)—specifically designed to move that process along.
As with everything in finance—and life!—however, there are tradeoffs involved.
Aside from stricter qualification criteria—which often exclude multi-family properties at the outset—there is a loss of flexibility and time. Which is to say, HUD places a strong emphasis on the amount of documentation and paperwork that needs to wind its way through the bureaucracy. This naturally leads to a greater time commitment both in the lead up to applying as well as potential delays on the approval side.
Some see HUD as a bulwark against rising insurance, tax, energy costs, and interest rates.
“Because people have to bring a lot of money to the table, what everyone is looking for is maximum proceeds,” Dovid Katz of Harper Capital Partners says. “HUD will get you maximum proceeds. That’s the advantage. And the reason for that is HUD has a longer amortization schedule—thirty-five years rather than twenty-five years. So, your payments are spread out more and you have to pay less each time. Which means your property is going to cash-flow more. Also, there is a lower debt service requirement—minimum 1.18 instead of a 1.25 percent. So, you’re able to stretch out more proceeds. No other loan will really beat out HUD on maximum proceeds.
“Also, in a higher interest rate environment, HUD has the flexibility to lower your interest rate when rates dip,” he continues. “If you were to do a HUD loan today at 6.25 percent and rates dropped to three percent a few years from now, you’re basically able to lower your interest rate—even though it’s fixed, it’s really more like a ceiling. You can essentially lower your rate without having to come out of pocket for a prepayment penalty and absorb the rate into the loan. You don’t have to guess when rates will go down—as soon as rates can go down, that’s when you can do it. You don’t have to guess the tops or the bottoms.”
AVERAGE LTV: Eighty to eighty-five percent.
AVERAGE INTEREST RATE: 5.5 percent.
ADDITIONAL COSTS: $25,000 application fee for due diligence and third party reports. A FHA application fee that is .30 percent of total loan plus FHA inspection fees of $30 per unit when repairs exceed $100,000 but are $3,000 or less per unit. (Over $3000, it will be either $30 per unit or one percent of total repair costs, whichever is greater.) Good faith deposit of one percent.
2. Fannie Mae and Freddie Mac
As the Federal Housing Finance Agency puts it, Fannie Mae and Freddie Mac “perform an important role in the nation’s housing finance system—to provide liquidity, stability and affordability to the mortgage market. They provide liquidity (ready access to funds on reasonable terms) to the thousands of banks, savings and loans, and mortgage companies that make loans to finance housing.”
And so, although some of the same drawbacks with HUD loans are present here—strict criteria, thorough documentation, similar (though not identical!) limits on multi-family financing—on the upside there are competitive interest rates with a more standardized, streamlined application and approval process.
"One important factor to positioning yourself for a Fannie Mae or Freddie Mac refinance is property stabilization,” Bolden Capital Group Founder & Chairman Edward Bolden says. “Agency debt typically requires 90 percent or higher average occupancy with preferred terms offered to over 95 percent occupancy. Stabilization of the property also includes taking the units from ‘classic’ to ‘elite’-style finishes to drive top of the market rents, controlling expenses and creating a safe and secure property. Most value-add properties have historically had mismanaged expenses due to absentee owners that are not driving accountability around expenses.
“A key metric for our operation is to lower expenses to be at or around 25 percent of net operating income (NOI),” Bolden continues. “Lowering expenses to be at or around 25 percent of NOI makes a strong case for the best value when positioning with Fannie/Freddie as the Debt Service Coverage Ratio (DSCR) is a key driver for the approval by Fannie Mae and Freddie Mac. In summary, experienced operators are heavily focused on ways to reduce expenses and control costs when positioning for refinance as lenders are laser focused on this component in the underwriting process."
AVERAGE LTV: Seventy-five to eighty percent.
AVERAGE INTEREST RATE: 5.7 percent.
3. Traditional Banks
Considering all of the above, you may presume the advantage of a traditional bank refinance is speed and flexibility—and you’d be right! These loans are faster, can be more lenient with LTV ratios, and offer a wider array of terms and rates depending upon your current portfolio of properties and credit situation. And you have more room to negotiate. Custom lending solutions for unique borrowers, in other words. (Spoiler alert: We’re all unique borrowers.)
Beyond that, however, the right traditional bank does more than simply assess paperwork and dispense loans—they help you navigate an ever-evolving, multidimensional process with many variables and moving levers. What do you qualify for? And what are your priorities? Is a faster process more important to you, on balance and within reason, than the interest rate? Or would you prefer a longer term? Would your goals best be described as short- or long-term? A team of seasoned experts can help you find the balance that works best for you within the context of the most current housing market.
In the last three years, for example, MVP Companies, LLC CEO Mike Sagaro has purchased nearly $200 million worth of properties, partnering with A&S Capital for bridge loans.
“The day of the closing I immediately start renovations of the portfolio,” Sagaro says. “Although I’m paying a higher interest rate, I’m increasing the property value and rents in a short timeframe, so when I go to the bank to refinance, the property has a higher value. I then use the bank loan to pay off the A&S loan and lower the interest rates. By that time, I have a property that is worth more.”
AVERAGE LTV: Sixty-five percent
AVERAGE INTEREST RATE: 7.15 percent
Your Next Steps
As Florida’s leading balance sheet lender, A&S Capital offers bespoke solutions for virtually all real estate bridge funding needs. Our professional team is dedicated to making the loan process painless, transparent and successful for domestic and foreign clients alike.
Don’t delay—reach out for a consultation today.
