Refi-Ready: How to Prepare Your Property and Financials Before You Go to a Lender

1. Getting refinanced in today's environment is not difficult if you are prepared. It is nearly impossible if you are not. The operators closing permanent loans right now started preparing twelve months before their bridge maturity — and the ones struggling are the ones who showed up at a lender's desk with a property that wasn't ready and financials that couldn't tell a clean story. In this episode, Louis walks through exactly what "refi-ready" means using a real working example: a 24-unit value-add property in the Midwest with nine months until bridge maturity. Step by step, the episode covers what a lender actually sees when they underwrite your deal, where the vulnerabilities are, and what to do about them before you ever submit an application. Covered in this episode: 
   • How to build your own refinance model before the lender does — and why DSCR at the refi is the only metric that matters
   • The NOI gap and why a $50/month rent increase per unit can add $200,000+ in loan proceeds
   • Why 91% occupancy isn't enough, and what it takes to stabilize before lender underwriting
   • What lenders actually want in your financial documentation package — and the gaps most operators miss
   • The difference between Freddie Mac, life companies, local banks, and debt funds — and when to use each
   • A month-by-month timeline for the nine months before bridge maturity
   • Why bridge loans that cashflow on IO are not the same thing as deals that work

 Plus a historical note on why the operators who closed on time had already submitted their applications before everyone else figured out the timeline. This episode is for operators with a bridge loan maturing in the next twelve months — and for anyone who wants to understand what refinance readiness actually requires before they need it.

BHPA - https://bhpropertyadvisors.com/

Transcript

SPEAKER_00 0:12

Welcome to Beyond IRR. This podcast examines real estate investments through the lens of structure, risk, and capital durability, not just headline returns. I'm your host, Louis Heiza. This podcast is sponsored by Beacon Hill Property Advisors. Today, let's talk about what it actually takes to get a property refinanced in today's environment. Not the theory of refinancing, but the practical work that happens in the six to twelve months before you even call a lender. Most operators think about refinancing as a moment in time. The bridge matures, you call a few lenders, you get quotes, you pick one. That is not how the operators who are getting refinance right now are approaching it. The ones closing perm loans in this environment started preparing 12 months before their bridge maturity. They knew what their numbers looked like, they knew what gaps existed, and they addressed them methodically. By the time a lender underwrote the deal, the asset was ready. The operators who are struggling, the ones getting extensions, taking haircuts on loan proceeds, or failing to even qualify entirely, are the ones who showed up to the lender's desk with a property that wasn't ready and financials that couldn't tell a clean story. Today I want to walk through what refi ready actually means. We'll use a real working example and go through the process step by step. And by the end of this episode, you should have a clear picture of what you need to do in what order and how much lead time each step requires. So here's the example we're going to use. This is a theoretical property. Although I am going to mix in some anecdotal refinances that I'm one that we just finished and one that we're in the middle of. Because there are a couple interesting things that occurred and came out of these two refinances that I think are worth sharing. But the general example we're going to go through, this is a hypothetical property. So let's use a 24-unit multifamily property in some secondary Midwest market. Let's say the operator acquired it three years ago as a value add, rents were below market, the property had deferred maintenance, uh, previous owner hadn't raised rents in five years, etc. The acquisition, let's say, was financed with a bridge loan. So uh let's put some numbers down. So let's say it was $1.8 million at 8.5% interest only, uh, 36-month term with a 12-month extension option. So the operator here in this example is has executed on the business plan. They've pushed rents, they stabilized occupancy all after they completed the capital work. The bridge matures in nine months. So now it's time to prepare for that refinance. So let's run through some stats on the current state of this property. 22 of the 24 units are occupied, so that's a 91.7% occupancy. Average in-place rents, let's say 925 per month, and market in this area is let's go, we're gonna call it 975. So that makes a current monthly rent, uh, gross rents at $20,350. Monthly operating expenses, let's say, are at $8,200. That obviously includes management, fees, taxes, insurance, maintenance, reserves, utilities, et cetera. So that gives us a monthly NOI of $12, uh150 or an annualized NOI of $145,800. The operator in this case wants a permanent loan, fully amortizing. It might not be well, hopefully, fully amortizing is what they're gonna go for here. It'll probably have a fixed period followed by rate adjustment periods, but there's not gonna be a balloon on this. So let's figure out what they need to do to be ready. Step one, know your numbers before a lender does. This is the first thing you need to do. Nine months out is build your own underwriting model of the refinance. Not to predict exactly what will happen, but to understand what a lender is gonna see when they underwrite your deal and where the vulnerabilities are. So here's how a lender will look at this property. They're gonna take your NOI, 145,800 annualized, and apply a cap rate to determine the value. In today's market for a 24-unit secondary Midwest multifamily, a reasonable stabilized cap rate is probably 6.5 to 7%. So let's split the difference and you use 6.75. So that 145,800 divided by 6.75% gives a $2.16 million stabilized value. So at a 75% LTV, let's say that's what the lender is going to go at max, that supports a loan of $1.62 million. But now let's check DSCR on this. So at a 7% interest rate, 25-year amortization, that annual debt service on $1.62 million is approximately $137,000. So DSCR, $145,800 divided by $137K, $1.065. Most conventional lenders uh want $1.2 to $1.25 DSCR minimum. So at $1.065, this loan does not qualify at 75% LTV. Now here's a quick note about calculating DSCR. And this was actually took me by a little bit of surprise. I'm not sure why, but I guess it makes sense in hindsight. So we were working through the refinance of an office complex in a Midwest market as a lender. It's a bigger credit union regional player, and they've had pretty strict underwriting compared to a lot of other lenders we've worked with, jumping through a lot of hoops to get this one done. And I presented to them, and this comes back to knowing your numbers before the lender does, I presented to them our as stabilized Proforma. This refi was actually to pull out a little more CapEx to finish a project uh that we had under budgeted. And then once that capex was done, there was going to be a stabilization period as well. And uh the so the Proforma numbers looked a little better than the current numbers. And I sent them the Proforma, and I had NOI, which you know is gross rents minus vacancy to get effective gross rents minus all the operating expenses. And the way I consider I define an operating expense is any expense that's the property's fault, uh is the way I like to look at it. So for example, management fees, property has to be managed, utilities, a property has utilities, property taxes, insurance. It's all the all the uh properties' fault for those um for those expenses. Another way to look at it is any operator, more or less, is gonna have that at the same expense. Uh sure, an operator can self-manage and not have management fees, but that's so rare that basically any operator is going to have management fees. And you know, if average management fees in your metro is seven, eight, nine percent, then that's just an expense that the the property is always going to incur. The key distinction here is once you've subtracted those operating expenses, that gives you NOI. And then uh you're still not at your profit number because you got to subtract a bit more. The biggest obviously being debt service. Debt service sits below NOI on a profit and loss sheet. Reason being is debt service is not the property's fault. An operator can come in and buy a property cash and not have debt service. So that's an expense that's really the operator's fault, not the property's fault. And so that's why it sits below NOI. You want to strip out anything that doesn't pass along with the property, and that's how you're gonna get apples to apples comparisons. That's why cap rates use NOI and not, you know, net profit or net cash flow uh before personal taxes. Some other expenses that I put below NOI would be like, for example, uh tax preparation for your LLC. You know, that's kind of more the operator's expense. You can file your taxes by yourself for very cheap these days. But if you hire a CPA or an accounting firm to do that for you, I would consider that a business expense, not necessarily an operating expense. And I put it below the line. Another example would be software. If you use QuickBooks, for example, that has a monthly fee or some other software to manage your LLC. I put those below NOI. So I gave the lender this pro forma, and I had calculated my DSCR as my NOI, not including those business expenses divided by debt service. And the bank came back with a lower DSCR. And the reason was they said, no, our NOI actually includes those business expenses. Uh now, those business expenses were very minimal compared to the operating expenses, so it barely lowered DSCR. But it was one of those things where, you know, I don't know, had I known that, maybe I wouldn't have it included that in my pro forma. That's not, you know, I'm not trying to pull the wool over anyone's eyes, but then again, that's, you know, that's it's a business expense. It's an LLC expense. It's not a property expense per se, even though in most cases your property is going to pay for those expenses. Uh so it is important to know how the bank calculates DSCR. You think that might be stock and standard, but uh different lenders uh might treat it differently. So back to our example here. Uh at a 75% LTV based on our 6.75 cap rate, we had too low of a DC DSCR. Uh so it's not going to qualify for that 75% LTV. So what happens if we drop to 70%? So that loan now comes down to 1.512. Annual debt service at 7%, 25 URM. Now we're looking at 128,000. DSCR, 1.14. We're still short. Let's try for 65% LTV. That's a loan of 1.404. Annual debt service, approximately 119. Now DSCR is 1.22. So now we're going to qualify. But we're leaving $216,000 of loan proceeds on the table compared to that 75% LTV scenario, which is what you may have underwritten uh three years ago, or this operator in this example when they underwrote this deal. And so that's going to be different. And that's going to uh that gap is going to need to be closed by bringing cash to the closing, potentially. Or if this is a cash out refi situation, you're looking at less cash ref cash out. So this analysis tells you two things at the nine-month mark. First, where you stand, and second, where you need to get to. In this case, the path to a better loan proceeds runs through the higher NOI. And that's really the story of refinances and lending right now is it's all about DSCR. So step two, identify and close that NOI gap. So the operator has, in this case, let's say two units at below market rent, 925 versus 975. The gap may seem small, but let us calculate the impact on the refinance. Closing that rent gap. 24 units times 975 is uh $23,400 month uh monthly as a gross rent. Annualized, that's $280,800. So at a 5% vacancy, an expected uh or effective gross income of $266,760. Your operating expenses remain at $98,400 annually. So now you're at an NOI of $168,360. So let's run that refinance with that new NOI of $168K. Stabilized value at a 6.75% cap rate. Uh the stabilized value has now gone up. It's now 2.494, a little over. So that 75% LTV loan is now 1.87, a little over that. Annual debt service at that same 7% interest, 25 year am, we're looking at approximately 158K. DSCR, uh in this scenario, 1.06. So we're still short at 75%. Um but don't forget we've raised the value, so that 75% of a larger value is a larger number. So we can actually probably work down our LTV, which is what we're gonna do. So let's try 70% LTV. That's a $1.745 million dollar loan. Annual debt service, approximately $148K. DSCR 1.13. We're still short, but getting there. Now back to our 65% LTV. We think this will work because it worked at that lower valuation. $1.621 million. Annual debt service, we're looking at about $137K. Now our DSCR is $1.228. So that qualifies. We are good to go. And now the loan amount is nearly what we needed before at that 75% LTV, but the lower NOI. So the rent increase from $925 to $975 on all 24 units. That's just $50 a month across the portfolio, added $220,000 in loan proceeds at your 65% LTV, $220,000 in proceeds from $50 in monthly rent per unit increase. So the math on rent optimization before a refinance is powerful. The operator needs to push the remaining below market rents to market before the lender underwrites the deal. They have nine months to do so. That's achievable. A lot of the leases are going to expire in that in that time period, you know, 75% of a year. And so you're going to push those renewal rents up to meet that. And anyone who doesn't renew and moves out, you have the opportunity to release these at market rents. And that should be doable. Nine months should be doable to push that NOI up. Step three here, we need to stabilized occupancy. So remember at the beginning, we stated that we had just under 92% occupancy. 22 of the 24 units were occupied. So the lender is going to underwrite vacancy at their standard assumption, say typically 5% to 7%, but they're also going to look at the trailing occupancy to valid, validate that stability. So two vacant units creates two problems. The first is the obvious direct income loss, you know, 975 market rent times two is 1950 per month and missing revenue. And the signal it sends to the lender about management quality and demand, you know, that signal, they're going to look at your 90, 91.7% occupancy and say, hmm, that's a little lower than we would have underwrit this. Maybe let's be a little more conservative. So getting up to that 95% plus occupancy, ideally 100%, even with a waiting list if possible, in the six months before the refi is one of the highest return activities the operator can do. It does three things simultaneously. It increases in-place income, it improves the lender's trailing occupancy average, and it demonstrates operational competence. So practically speaking, if the two vacant units need work before they can be leased, that work should be scheduled immediately. That should be an A1 priority. And if there aren't the reserves to knock it out, that's a common conversation you have with your other partners, limited partners, whomever you have on the deal, and say, hey guys, let's put together whatever it is, a couple thousand dollars per unit, uh, because there's going to be a serious return on this. If we can knock these out real quick and get these leased, showing a lender 100% occupancy or close to that is going to make this refinance much, much easier. So that should really be a trigger to you that this is a priority. If they're move in ready, on the other hand, the operator should be aggressive on lease up, even at market rent, rather than holding out for slightly above market. The loan proceeds gained from full occupancy far exceed the value of holding out for an extra $25 per month. So now let's look at step four here, cleaning up the financials. This is a step most operators underestimate. So lenders are not just looking at your NOI, they're looking at how you track it, how you document it, and whether the numbers are consistent and explainable. So here's what a lender is typically going to ask for, and what the operator needs to have a looking clean. So you're going to need a trailing 12 months of operating statements. These need to be consistent month to month. If expenses spike in one month, there should be a clear explanation: a one-time capital item, a seasonal insurance payment, a repair. Unexplained volatility raises flags. And if your property management software generates these automatically, audit them for accuracy before the lender sees them. Another example is, you know, even if you do your reporting on a cash basis as opposed to accrual, it might be worth it to modify your statements to what's called a modified accrual basis, or maybe it's modified cash. Either way, it's halfway in between where a lot of the uh transactions, both rent revenue and expenses, are done on a cash basis. However, some of the like bulky expenses that occur only a couple times a year, taxes being one of them, if you pay your insurance premium once per year to save on the premium, for example, instead of having these big, you know, twice a year big property tax expenses that that you know push down NOI, even though it looks, you know, it's explainable and a lender's gonna understand it. I would prefer to split that up into 12 payments, uh, just so everything looks consistent. Another thing I'll see is is like, let's say utility bills, maybe they come in towards the very end of the on very end of the month or very beginning of a month. And maybe your staff for for one month, maybe when those bills came in on the 29th or 30th of the month, they didn't get to record them that day. And then the next day, you know, the 31st or the first is is the weekend. And so they don't get recorded until technically the next month. What can happen is actually one month can have very low utilities or, you know, whatever the bill is, insurance or management fees, they can kind of stack up in one month and leave the month previous or the month after void of them. And again, it just shows this kind of volatility that a lender is going to have to dig into. Clean that up. You know, if you see that February's utility bills were actually paid on the first of March just because of the timing of the bills and there was a weekend in there or something, just shift those expenses back into February. There's nothing wrong with that. It's not illegal. You know, they were accrued in accrual accounting in the month of February. They just weren't recorded till March, but it just smooths everything out. And that's what lenders want to see. You want to make their job easy. Uh, the next point here is rent roll. You want this current as of the day you submit. So every unit should be listed with the tenant name, the lease start and end dates, the monthly rent, security deposits held, um, and any concessions. If you have month-to-month tenants, be prepared to explain why you haven't converted them to lead term leases. A rent roll with a lot of month-to-month leases signals instability to a lender. A lease abstracts for every current tenant, the lender's underwriter will want to spot check these against the rent roll. So inconsistencies, for example, a rent roll showing 975, the lease showing 925 creates problems. So you're gonna want to audit that. Capital expenditure documentation. If you've done capital work during the hold, you know, new roofing, HVAC replacements, unit renovations, document it along with the line item, you know, the the actual money they spent on that particular item. This supports your value add narrative, explains why the property is worth more than you paid for it. And so invoices, contractor contracts, before and after photos if you have them, these are all great things to have organized. You know, either Google Drive folders or Dropbox folder, whatever system you use, having these be ready and prepared to send immediately makes the lender's job easier. A property tax records and insurance declarations, make sure they're current. Make sure the insurance coverage is appropriate for the property value at stabilization. Some operators forget to update their coverage as value increases, which creates a gap that the lender's flag. The lender's gonna say, hey, you're gonna need to up your insurance, which is probably gonna up the premium. And maybe your current NOR or your projections didn't account for that. And now all of a sudden your DSCR drops. So the operator in our example should spend 30 days pulling all this together into a clean package, and not because the lender needs it formatted perfectly, but because the process of assembling it will reveal any gaps before the lender finds them. Step five here, understand your lender options. Not all permanent lenders look at the same asset the same way. For a 24-unit secondary market multifamily, the operator has several options and each has different requirements. Freddie, Mac, and Fannie Mae, for example, the agency lenders, they typically they're gonna have the best rates for stabilized multifamily. Uh minimum loan sizes, usually a million dollars or above. DSER, they're gonna be strict. It's gonna be 1.25, I think is their standard. And they're gonna send a third-party appraiser and inspector that's gonna look at every single unit. Ask me how I know. Most uh appraisers don't look at every unit. Uh, Freddie Mac will. So the property needs to be in good physical condition and not just financially performing. Deferred maintenance is a real risk here. And if you end up going with an agency lender, they're gonna cite deferred maintenance or items they want taken care of, and then they're gonna give you a timeline that if you close this loan with us, you have to get these done and prove you got it done with pictures or re-inspections in a certain amount of time. Life insurance companies, for example, um, they're very conservative underwriters, but they're often willing to go to 1.15 DSCR on a strong asset with long operating history and good markets, you know, that show good stability, such as high occupancy over a long period of time. Um, and the loan sizes tend to be larger. So that's another thing to keep in mind. Mind, but this is a much slower process for both life insurance and agency lenders. So you're going to be looking at 60 to 90 days to close. Local and regional banks, however, give me a lot more flexibility on DSCR and property condition. And they will uh because they they're going to portfolio these loans rather than sell them, generally speaking. And so it's very relationship-driven. Having a banking relationship before you need the loan matters. But for these reasons, rates are typically going to be a little bit, you know, 25 to 75 basis points higher than agency. For the operator in our example, with a stabilized property and clean financials, agency financing is probably the target. But they could run a parallel process with one or two local banks as backup. Having a committed term sheet from a local bank gives you leverage in the agency process and a clear alternative if something goes sideways. Step six here. This is the timeline. So here is how the nine months leading up to the refi breaks down. So months one through three, you got to close that NOI gap. You push remaining below market rents at the next lease renewal, fill vacant units, renovate them first if you need to, order and complete any deferred maintenance that would flag in a physical inspection, and start assembling the financial documentation package. Months four through six, get the trailing 12-month financials clean and consistent. Convert month-to-month tenants to term leases where and as possible. You might want to commission a preliminary broker opinion of value, not a full appraisal, but a market check to make sure your stabilized value assumption is defensible. If it comes in lower than expected, you'll have time to adjust. Months six through seven, begin the lender outreach. So start with two or three lenders, an agency, a local bank as a backup. Share your property summary and financials, get preliminary feedback on sizing and terms. This is a screening conversation, not a formal application. Then on to months seven through eight, you're going to now submit your formal applications to your top two lenders. Expect the lender to order third-party appraisal and property condition report. The appraisal typically takes 30 to 45 days. That's usually the longest thing that holds everything up. So you're going to want the you're going to want that to be ordered very quickly. The property condition report can flag items that need to be addressed before closing, and so know this before the clock is ticking. And finally, months eight through nine, you're going to receive loan commitments, negotiate terms, select your lender, and then execute the closing process. At that point, you retire the bridge loan at maturity and uh you are officially refinanced into perm debt. So this timeline only works if you start at month one. Operators who start at month six, 90 days before their bridge matures, are at the mercy of the process. Remember, the appraisal alone is often going to take 30 to 45 days. If your lender requires an environmental, a phase one, a god forbid a phase two, those can take a while too. Another thing, uh, if you don't have on file, lender might need is an A2 survey or at least a boundary survey. Again, these are all things that now you're privy or you're um you're beholden to the timeline of an engineer or a surveying company or an environmental inspection company. So if something comes back that needs to be addressed, you're not going to have time to fix it if you don't start in month one. So the honest summary here to wrap this episode up: refinancing in this environment is not difficult if you are ready. It's nearly impossible if you're not ready. So what does ready mean? NOI at or above where your debt coverage math needs it. Occupancy at 95% or above with documented trailing performance. Financials that are clean, consistent, and explainable. A property in good physical condition, and a lender relationship that starts before you need the loan. The operators getting refinanced today did not get lucky. They did the work methodically ahead of schedule with a clear-eyed view of what the lender was going to see. That is the work this episode is about. And if you have a bridge loan maturing in the next 12 months, it is work you should be doing right now. So, fun fact here to close out this episode: the average time from formal loan application to closing for a Freddie Mac conventional multifamily loan is about 45 to 60 days under normal market conditions. During peak 2021 volume, that stretched to 90 to 120 days in some cases, as the agency pipelines became overwhelmed. The operators who closed on time had submitted their applications before demand peaked. The ones who waited, even by a few weeks, found themselves racing a clock they hadn't expected. So the lesson applied to refinancing the same way it applies to every time-sensitive financial transaction. The process takes as long as it takes, and the time you save by starting early is almost never the time you lose by finishing late. Thanks for listening. See you on the next episode. Thank you for listening to Beyond IRR. This podcast is produced by Beacon Hill Property Advisors, where we focus on bringing clarity, structure, and rigor to real estate investment analysis. If you want to evaluate deals beyond headline metrics and better understand the mechanics driving performance, you can learn more about our tools and approach at bhpropertyadvisors.com. You can also connect with us directly for demonstrations, resources, and additional insights. Until next time, analyze deeply, allocate wisely, and always go beyond IRR