By Randolph T. Mason, CCIM, SIOR
I have a client who owns two (2) investments properties in various parts of California and wants to take advantage of the current real estate cycle. He wants to refinance his existing properties, which currently have very little debt, pull out cash to make all cash offers for potential properties. All cash offers are what are attracting sellers these days.
This is what is going on in the finance world: The banks are looking specifically at the strength of the tenants that are occupying the investment real estate. They want to make sure the tenants are sound, have strong balance sheets and income statements, and would otherwise be able to continue to make their monthly payments, which the buyer uses to make their mortgage payments.
Banks are also looking for personal guaranties, as these are all recourse loans due to the current underwriting standards. Banks are also looking for loan to value ratios of around the 65% range with the values being based upon cap rates in the 9% and above range. Bottom line, banks are being very conservative.
The interest rates generally would be for a 3-5 year fixed period at a 7% and above range. It’s very common for the bank to require the buyer to have a strong banking relationship, otherwise known as having all of your deposits and checking accounts within their institution. The regulators are also being extremely strict regarding the fact that they want banks to lend in their lending areas. Banks typically need to have the lender located within their lending area.
As a side note, the FDIC is closely monitoring large and small banks and as such, many of these smaller institutions are unable to originate income property loans. It is a challenging and exciting market we are in and transactions are happening albeit slowly.