Cash-out Refi’s

Have a few questions on cash-out refi's for investment properties that I am hoping the forum can help with. 
 

What kind of interest rates could you expect assuming fantastic credit, good area, and history of cashflow? In this scenario, what would be the average interest rate spread between owner-occupied, non-investment properties vs. investment properties? 
 

Are there any national players in this space or are there just local credit unions and hard money (online lenders and local)?

Assuming due diligence is longer for these deals and dependent on number of properties. For a single property, how long would it take for a deal to close?

Comments (11)

Aug 17, 2022 - 5:16pm
CRE, what's your opinion? Comment below:

Sorry, man. Haven't played in the existing asset game since I was an intern. 

Commercial Real Estate Developer

Aug 17, 2022 - 5:28pm
Ozymandia, what's your opinion? Comment below:
Associate 1 in CorpDev

Have a few questions on cash-out refi's for investment properties that I am hoping the forum can help with. 

What do you mean by "cash out"?  As in, take out 100% of your equity (or more, if possible)?  Refinancing in general is usually for the purpose of taking cash out.

What kind of interest rates could you expect assuming fantastic credit, good area, and history of cashflow? In this scenario, what would be the average interest rate spread between owner-occupied, non-investment properties vs. investment properties? 

Depends on a lot of factors.  Affordable housing tends to get much higher leverage at much better rates than regular multifamily.  Size matters; you'll get better rates on a $500mm deal than on a $5mm deal, I'd think.

Are there any national players in this space or are there just local credit unions and hard money (online lenders and local)?

Assuming due diligence is longer for these deals and dependent on number of properties. For a single property, how long would it take for a deal to close?

Again, some of this depends on what "cash out" means.  And obviously basis matters too.  If I bought an asset in 2009 for $10mm, with $3mm of equity in, and that asset is now worth $50mm, you bet your ass I'll be able to cash out a ton of money, because even a low LTV will take out my basis.  If you're wondering whether you can buy an asset today, make some superficial repairs (e.g. what people call "value add" most of the time) and then take all your equity out a year later, that's probably a tougher lift.  If you've got a story to sell then maybe you'll find a mezz lender like Madison Realty Capital that believes in your vision and is kind of operating in the loan to own space anyway, then you might have some success.

Taking out that kind of leverage is obviously dangerous, though, and it depends on your business model.  If you churn through deals for the fees and aren't really looking to the back end for a payday, and you're in a buoyant market, then you can probably do this.  Whether that is smart or sustainable... little different.

  • Associate 1 in CorpDev
Aug 17, 2022 - 5:53pm

By cash-out, I mean if you bought a $100 property with $50 of debt and now that property is worth $200 and you have $40 of debt (after paying down principle), could you refi say for $160. This is opposed to just refinancing the original or remaining debt. 
 

I know this possible to do with one's own home that you live in with any bank and that pricing isn't insane, but I'd imagine there would definitely be higher rates associated with investment properties. I'm trying to understand who I should talk to if I want to do a cash-out refi on five properties and what ballpark pricing I should expect. These are all in prime areas in the Southeast with strong rental history. My own FICO is 720+.

Most Helpful
Aug 17, 2022 - 6:24pm
Brody92, what's your opinion? Comment below:

I am a multifamily banker and we do cash out refi's but a couple of things- If you bought a $100 asset and you have not invested any capex, your cost basis is $100. By expecting $160 proceeds, you have no equity left in the deal. That is tough generally but it can be done. Max LTV's are often automatically lower for refinances by 5 or 10 bps than acquisitions (70-75% instead of 80%) and a cash out refi will be even more punitive. Interest only periods will be lower as well. Deals can be constrained by a 1.25x DSCR too. When you acquired the asset and the story here matters too. A 2005 acquisition versus a 2021 acquisition makes a difference. Your cost basis can be low if for example you acquired a distressed hotel off market and converted to multifamily, this is what I mean by the story, you need one when you have a cash out refi. Feel free to PM me if you have any questions, happy to be a resource. I only work with multifamily assets (not 1-5 units) and on loan amounts greater than $1MM but happy to answer any questions. 

Learn More

300+ video lessons across 6 modeling courses taught by elite practitioners at the top investment banks and private equity funds -- Excel Modeling -- Financial Statement Modeling -- M&A Modeling -- LBO Modeling -- DCF and Valuation Modeling -- ALL INCLUDED + 2 Huge Bonuses.

Learn more
  • Associate 2 in S&T - FI
Aug 17, 2022 - 9:54pm

If you're referring to 1-4 unit (i.e. single family) property with a personal guarantee, rates probably in the ~8% range on a 30yr fixed. 
 

Probably will need >1 DSCR and max LTV of 70 on a cash out. Just google "DSCR loan". 
 

Source: I'm an RMBS banker that works on single-family DSCR loans pretty frequently 

  • Associate 1 in CorpDev
Aug 17, 2022 - 11:08pm

Awesome, thanks! Seems like these loans are around double the interest of owner-occupied. This corroborates some other info I found. That 8% rate seems incredibly expensive for the best properties, super prime credit, and strong rental history though. That's around the historical average yield for corporate junk bonds if I'm recalling correctly. 
 

Do you think this average rate is so high because of risk around tenant credit, property prices, business operations (discrimination lawsuits, bad tenants, improper property maintenance, ect), and wear & tear or is it something else? I'm just trying to understand what the other side is thinking before shopping around for a loan and negotiating.

  • Associate 2 in S&T - FI
Aug 22, 2022 - 11:46pm

Apologies for the somewhat delayed response here, but there's a couple different things going on here.

Even a vanilla conventional loan is going to run you north of 5% at the moment, so the spread is not quite as large as it sounds. That being said, if your income supports it, you can get a similar kind of loan underwritten to your personal income (rather than property income), which would probably be a bit lower. If you can meet agency underwriting guidelines/standards, you I'd guess that you could get this loan in the mid-high 6s range. A similar non-agency loan would probably be low-mid 7s. Rates have gapped out a bit since my original response so trying to keep it comparable, but might be a bit higher today.

A cashout loan on a non-owner-occupied property is pretty much as risk-layered as it gets in mortgages, so to some degree, yes, the rates reflect the increased expectations of default/loss severity on these kinds of loans (based on observed historical data). The historical data incorporates the impact of some of the things that you mentioned, but they're not looked at individually (i.e, no one is forecasting the probability/cost of discrimination lawsuits specifically). Ultimately, the place where loan characteristics matter most is in rating agency models, since these will drive how much of a hypothetical securitization of these loans (which is the main takeout/source of funding) will be AAA vs. AA vs. A and so on, which drives the funding cost and yields on the equity/residual classes. 

Comparing to corporates is a fair comp as far a comps go, but mortgages have a lot of other idiosyncrasies that make the comparison somewhat tricky. Mortgages have uncertain cashflow profiles because of the embedded call option (the borrower's right to prepay), so in addition to being willing to be long the credit risk (in the case of non-agency mortgages), which itself entails having a general macro view, a view on local property prices/performance, and the performance of individual borrowers/subsets of borrowers, you also have to be comfortable/familiar with the interest rate risk.

There's a smaller universe of capital that's willing/able to take the time to understand that risk, which definitely leads to more volatility in pricing. I would say that mortgages are at or just below their recent wides vs. corporates, so the gap is more extreme now vs. even a year ago.

  • Associate 3 in RE - Comm
Aug 23, 2022 - 12:03pm

Ratione ipsum sed placeat eos illum dolor. Nisi quos eum reiciendis provident et.

Beatae ut sed qui voluptates expedita. Ipsa molestias et et modi magnam quia. Recusandae omnis nesciunt dignissimos omnis voluptas. Voluptatibus possimus perspiciatis vel enim. Nulla mollitia dolorem nesciunt est eligendi.

Culpa mollitia perspiciatis qui qui tempora quasi. Quia quam nam eos pariatur aliquam vitae modi totam. Quo quo voluptate cumque occaecati in magnam. Est eos voluptas alias id vero ipsa.

Velit ut similique labore sequi enim. Excepturi aut impedit illo et doloremque qui. Beatae quisquam molestiae sit qui cupiditate.

Start Discussion

Career Advancement Opportunities

September 2022 Investment Banking

  • Jefferies & Company (▲05) 99.6%
  • Lincoln International (= =) 99.2%
  • Bank of America Merrill Lynch (▲04) 98.8%
  • Financial Technology Partners (+ +) 98.5%
  • Evercore (▽02) 98.1%

Overall Employee Satisfaction

September 2022 Investment Banking

  • Jefferies & Company (▲12) 99.6%
  • Greenhill (▲07) 99.2%
  • Evercore (▲01) 98.8%
  • PJT Partners (▽02) 98.4%
  • Macquarie Group Limited ABN (▲21) 98.1%

Professional Growth Opportunities

September 2022 Investment Banking

  • Jefferies & Company (▲05) 99.6%
  • Lincoln International (▲03) 99.2%
  • PwC Corporate Finance (▲12) 98.8%
  • Bank of America Merrill Lynch (▲05) 98.5%
  • Houlihan Lokey (▲05) 98.1%

Total Avg Compensation

September 2022 Investment Banking

  • Director/MD (10) $613
  • Intern/Summer Analyst (318) $407
  • Vice President (38) $392
  • Associates (209) $257
  • 2nd Year Analyst (130) $163
  • 3rd+ Year Analyst (19) $160
  • 1st Year Analyst (438) $151
  • Intern/Summer Associate (83) $150