How Cost Basis Affects Multifamily Refinance Outcomes

One of the questions I'm regularly being asked by lenders for multifamily refinances is, "What's the cost basis?"

⚙️ FORMULA

(1) Purchase price + (2) Capital improvements made since purchasing the property = Cost Basis

While closing costs (soft costs) are part of your total costs at acquisition, many lenders will exclude closing costs from their cost basis calculation, as they are more interested in hard costs.

WHAT'S CHANGED

1. In 2022, many lenders would ignore cost basis if you owned the property for at least 2 years.

   
   

2. In 2025, I'm getting asked what the cost basis is from many more lenders, even if the property was purchased more than 2 years ago.

   
   

3. From their perspective, valuations for most properties haven't gone up over the last several years, making them more interested in what you actually paid for and put into the property.

WHY IT MATTERS

If a lender is asking what your cost basis is, this could be an indication they'll be limiting your loan amount to the lessor of:

• X% Loan to Cost and

• X% Loan to Value.

I put X there, as lenders have different requirements.

Example:

• Let's say your cost basis is $900,000, but the property appraised for $1,000,000.

• The lender says they will lend you the lessor of 75% LTC and 75% LTV.

75% LTC x $900,000 = $675,000

75% LTV x $1,000,000 = $750,000

The Lessor of the above = $675,000

💡 HOW THIS IMPACTS YOUR INVESTMENT STRATEGY

A great way to recycle your equity is to purchase a property, improve it, and do a cash-out refinance. However, a cash-out might not be available if the lender limits you based on your cost basis.

💡 POSSIBLE SOLUTIONS

1. The most obvious solution is to proceed with a lender that doesn't care about cost basis. These lenders are typically more expensive in today's market.

   
   

2. The second solution is to show the lender how much value you added to the property, making your cost basis less relevant.

   
   

   Example: We increased rents by X%, reduced bad debt, added several other income streams, and reduced expenses, resulting in an annual NOI increase of $50,000. Occupancy was 80% at acquisition, and now we're hovering above 90% year-round.

   
   

3. Hang onto the property longer. The more time that's passed since acquisition, the less lenders will care about your cost basis.

   
   

4. Sell the property. Depending on your outlook for future real estate valuations, now might not be the best time to sell. But if you need liquidity or see a better opportunity that requires cash, selling might be your best option.