Whether you are a first-time multifamily investor or longtime owner, it’s always a good idea to understand how to maximize the value of your investment. Today’s lower interest rates have made refinancing a popular tool that allows landlords to reduce their long-term borrowing costs and, in some cases, free up equity.
Kass Management recently sat down with Sam Gold, vice president of originations in the Chicago office of Arbor Realty Trust Inc., for a Q&A on when and how to refinance a multifamily property:
KASS: What makes the Chicago market attractive for today’s multifamily investor?
GOLD: I believe that Chicago is one of the most diverse and vibrant cities in the United States. Although it began as an old industrial and financial city, Chicago has evolved to become a top tech center. With companies like Google and McDonald’s making huge investments in hiring, downtown Chicago is becoming an increasingly attractive place for the workforce population – namely, millennials. With the majority of the workforce moving downtown, and single-family and condominium markets being very expensive (anywhere from $400-$800 per square foot), multifamily rentals have become the preferred way of living. This has been the trend in major cities like San Francisco and New York for years, but now Chicago is joining the ranks. Additionally, delayed marriage means that younger generations are not looking to purchase homes as early as previous generations. As a result, multifamily rentals are their top option. I think going forward, multifamily will remain robust and vibrant in Chicago.
For years, Chicago has been a cash flow market, another characteristic that makes it very attractive to multifamily investors. Now, there is also a bit of appreciation. Faced with lower yields in the coastal markets, multifamily investors have been coming to Chicago to take advantage of the strong cash flows and affordable rents. Also, a majority of stock in the city still has a value-add component, which is another draw.
KASS: Why should I consider refinancing my investment property?
GOLD: There are really only two main reasons to consider refinancing. The first is to take advantage of the low interest rate environment for a longer period of time. The second is to cash out equity for future investments or portfolio growth. Investors from California and New York have been doing continuous cash-out refinances in their respective markets for years, given the appreciation of those locales over last 10-20 years. Meanwhile, Chicago has lagged somewhat following the recession. That’s beginning to change, however, and the time to take advantage of low rates and rising property values is right now. Additionally, cash-out refinances build the overall balance sheet of the investor, which is useful for future investments and liquidity requirements that lenders may need.
KASS: When is the best time to refinance my investment property?
GOLD: The best time to refinance is while rates remain low and upon completion of any renovations.
KASS: What type of loan terms should be considered when refinancing?
GOLD: Leverage, rate, debt service, prepayment, amortization, and recourse vs. non-recourse must all be considered. With agency loans, leverages typically go up to 75 percent LTV on purchases and 70 percent on refinances, while a few can go up to 80% LTV with certain geographical or other restraints. Debt services range from 1.20 to 1.30 in most cases. Amortization is up to 30 years. Agency products typically beat out banks in the recourse department, with Fannie Mae and Freddie Mac multifamily options that are non-recourse with standard carve-out provisions.
Additionally, investors should also pay attention to certainty of execution and total fees. When looking to refinance or purchase a multifamily property, investors need to consider what is most important and look at all the debt options. To me, the cost of debt vs. equity is the major consideration here.
Between 2008 and 2010, almost no one was truly lending. Today, investors have access to an expansive set of options for multifamily lending. I certainly hope that the trend will continue, and believe that it will as long as capital remains available.
KASS: What are some refinance mortgage programs available?
GOLD: There is ample bank financing available from small and regional banks all the way up to national institutions. However, the credit metrics in banks are tightening up a bit, given the overall growth in multifamily lending over last five to seven years. Very few banks are lending up to 80% LTV on both purchases and cash-outs. They are also looking for stronger, more seasoned investors and recourse debt. Meanwhile, Fannie Mae and Freddie Mac continue to provide strong lending opportunities for both small and large balance loans in all of the U.S. markets.
Sam Gold, vice president of originations, Arbor Realty Trust Inc.
Sam Gold is vice president of originations and based in Arbor’s Chicago office. With more than 15 years of experience, Mr. Gold concentrates primarily on developing Freddie Mac SBL, Fannie Mae, and HUD business in the Midwest, Dallas, Chicago and Milwaukee regions.
Prior to joining Arbor, Mr. Gold was Vice President and Senior Underwriter at JPMorgan Chase. Previous to his tenure at Chase, Mr. Gold was at Sovereign Bank/Banco Santander as a Senior Commercial Underwriter and Credit Officer (CRE) and as a Senior Commercial Valuation and Advisory Consultant. He also served as a senior commercial valuation and advisory consultant at Urban Real Estate Research, Inc.
Mr. Gold earned a Master of Business Administration from DePaul University and a Bachelor of Science in Management Information Systems from Miami University.