You’ve undoubtedly come across the phrase “cash-out refinancing” in your real estate research. Commercial banks promote this notion as a way to acquire money to pay for vacations, repairs, renovations, or whatever else you desire, making it a hot commodity in the residential real estate market. While residential mortgages are the most common kind of these refinancing transactions, commercial properties may also benefit from them.
When it comes to commercial real estate, what does cash-out refinancing entail, and why would you want one? Learn more about commercial real estate refinance and how to save money here: https://lendingbeeinc.com/commercial-property-refinance/
Table of Contents
1. Investment Property Cash-out Refinancing
The fundamentals of getting a mortgage are the same whether you’re buying a modest starter house or a multimillion-dollar office building. The mortgage will be secured by an asset with some value. Mortgages allow you to finance part of the purchase price of a home. Typically, they will provide a loan of up to 80% of the property’s worth (the buyer will be required to put down 20% of the price of the property).
As you make mortgage payments, your loan balance with the bank decreases. If the value of the property stays the same or increases, the loan-to-value (LTV) ratio will go down. A loan-to-value ratio of 80% would apply, for instance, if $800,000 was financed against a $1 million purchase. That mortgage of yours costs you $100,000 each year, but the home is now worth $1,450,000. With a $700.00 balance and a $1.4 million value, your LTV is now 50%.
If your bank can finance up to 80% LTV, then you may “cash out” the remaining 20% via a cash-out refinancing. A new loan of $1.12 million (or 80% of $1.4 million) would allow you to pay off the prior debt of $700,000 in full. You may keep the extra $420,000 in cash.
In the same manner that residential properties are bought and sold, so too are business ones (e.g., single-family homes). In many cases, commercial real estate syndicates would benefit greatly from cash-out refinancing. Syndication will likely take this action for the following three reasons:
2. Capital Expenditures That Are Funded Using Tax-free Money
Expenditures on capital improvements may be funded by drawing on the equity you’ve built up in your business property after its value has increased thanks to increased income. In order to maximize your return on investment, you can decide to invest in major property improvements.
In principle, you could wait for rentals to build up your company’s bank account to the point where you can pay for this out of pocket. Alternatively, you may cash in on your property’s equity and invest in necessary repairs in order to quickly see a rise in rental rates. You may sell the building much more quickly and with less risk, if you charge higher rentals, since the increased value will allow you to do so. Furthermore, rental income is taxed while equity withdrawal is not.
3. Refund Finances More Quickly
An important objective of every real estate syndicator is the prompt repayment of investment. Giving back the money that was originally invested is a huge show of good faith that will encourage investors to invest again. It’s also your legal obligation as their “fiduciary” with their money. Through cash-out refinancing, you may return funds to investors while decreasing their exposure to risk. Use the services of Lending Bee to calculate the cost of debt.
4. Protecting Oneself From Unexpected Costs By Avoiding Balloon Payments
Unlike mortgages on single-family homes, commercial mortgages have substantially shorter repayment terms. A loan with a two-year maturity might be in your future. Let’s say you have taken out a loan, but you don’t have the money to repay it. A cash-out refinancing might be useful in this situation for two reasons: Adjust the loan conditions to your liking (lower interest rate, longer term, etc.) and provide you with working capital, including a rainy-day fund for your mortgage.
Refinancing before the loan’s maturity is required to prevent a balloon payment (even if done without taking cash out).