Cash out refinancing for commercial real estate is one method that investors use in order obtain funds to acquire more properties.
By obtaining another mortgage from a bank or more typically, a hard money lender, investors can retrieve the value of the property’s equity. In order to do so, they refinance the property’s mortgage so that includes not only the original loan, but the withdrawn equity as well.
For example, let’s say they have a commercial income property worth $1 million. The original loan was for $750,000, but at the present time the remaining amount owed on the property is only $500,000. That leaves an equity of $500,000, which they can cash out by getting a second mortgage which will completely replace the first.
Cash Out Refinancing Question #1
Question: What types of documentation do banks request?
Answer: Banks typically request:
- An appraisal rehab documentation
- GC documents
- Tax returns
- Bank statements
- Pay stubs from past 30 days
- Verification of additional income sources such as Social Security
- W-2 forms for the past 2 years from every employer
- Last 2 years of tax returns if you’re self-employed or work on a commission basis
- Investment/Retirement account statements showing current market value
- Recent bank statements
- Copy of lease or rental verification if you’re a renter
- Copy of the Sales Contract or Letter of Intent of the commercial property you intend to purchase
- Copy of your Earnest Money deposit check
- Copy of divorce decree or bankruptcy papers
- Child support payments (payer or payee)
In the case of buy and holds the bank may not ask for documents, though this depends on the title seasoning and if you’ve owned the property longer than 12 months.
Cash Out Refinancing Question #2
Question: Does it make sense to prepare a presentation to the bank about your request? And if so, what type of information should be included in the presentation?
Answer: Presentations help your proposal stand out from the dozens of requests sitting on a lender’s desk. It’s purpose is twofold: to prove that your business will repay the proposed loan, and that there are sufficient assets to pay off the principal in the event the loan goes into default.
Your presentation should include these elements:
- Cover Letter
- Memorandum (Executive Summary)
- The Borrower (Description of you and your company)
- The Collateral
- The Market & Marketing Plan
- The Underwriting (Financial soundness of your plan)
- Recommendation (Summary)
Cash Out Refinancing Question #3
Question: What are the typical seasoning requirements?
Answer: The seasoning requirements depends on what value you’d like to use. If you’re using market value, then the time period is 12 months.
If you’d like to cash out sooner, for example at six months, then the maximum anount is 70% of the acquisition costs,, which include the purchase price, closing costs, and any documented rehab costs. Between six to twelve months you can cash out on the lower of the either the appraisal or acquisition cost.
Cash Out Refinancing Question #4
Question: What is the average credit score requirement?
Answer: About 620 fico for a conventional mortgage, although the average does vary.
Cash Out Refinancing Question #5
Question: What’s the average loan to value ratio?
Answer: The average loan to value ratio is 75% on non-owner short sales and foreclosures, or 70% on 2-5 units with conventional financing.
Are you considering a cash out refinance for a commercial property? Let us know why in the comments below.