Your original commercial loan might have had less than satisfactory terms and conditions due to a number of circumstances. Cash out refinance (refi) can help you improve your net operating income (NOI) and loan terms and conditions. Learn the types of commercial investment properties eligible for a cash-out refinance.
Having cash in your hands is always beneficial because it gives you more options. There are many circumstances where cash-out refinancing can be beneficial in helping you achieve your goals. Cash out refinancing can be beneficial before or after a significant change.
With more money in your pockets, you have more options for your specific property or your entire investment portfolio. Cash out finance can be a solid mechanism to properly value real estate that has appreciated in price. Cash out refinancing can keep the money flowing through your wealth portfolio.
Your specific commercial investment property characteristics will determine what can be gained form a cash out refinance. The most common reasons for cash out refinance are the following: 1. Increase Cash Flow or 2. Lower Interest Rates. It might be time to refinance to advance to another stage in your wealth building journey.
1. Increase Short Term Cash Flow
With a cash out refinance investment property, you can tap into your built-up equity. You have worked hard to make your payments on time. Now, you can reap some of the benefits of your due diligence.
Getting a lump sum payment of cash could be very useful for the properties, you own or for adding new investments to your portfolio. With the cash, you could renovate the property, increase the rent and increase the net operating income. A higher income could enable you to repay your refinance loan faster.
It takes money to make money
Business owners can use the cash for payroll, rent and supplies. With surplus cash, you can add new products or services. You can engage in a marketing campaign to promote a new brand.
It takes money to make money. Positive cash flow allows you to keep pace with the competition.
The cash out refinance option might provide you with funds faster than a traditional loan. You can get the money in your hands and pay your bills immediately. Or, you can use the extra cash to increase the long-term value of your investment portfolio.
Keep Money Moving
Nowadays, money moves like “quick silver.” The secret to growing your wealth is keeping your money flowing – “money velocity.” You want to use your loan options to increase your income-producing assets.
There is few types of commercial investment properties can be refinanced: Multi-Family, Hi-Rise apartments, corporate rental apartment, retail stores, strip center, outlet mall, cluster of shops with restaurants, office complex, industrial/manufacturing, heavy manufacturing, warehouse, healthcare park, hotels, golf resorts and ski resorts, conference , conference, convention & exposition centers
Unfortunately, with a normal loan, your funds might become stagnant in one piece of land. This money becomes illiquid. Once your property has appreciated or you have increased the equity to a certain extent, you can use the cash out refinance investment property to increase your liquidity. Liquidity allows you to invest in the most profitable investment opportunities.
Cash pleases everyone.
Keep your money active, productive and liquid. You can build layers of wealth upon the same initial investment with cash out refinance. The cash out refinance investment property allows you to invest in lucrative opportunities.
Having cash-in-the-hand gives you more options. Financial institutions like when you have more cash on hand. You can grow your wealth by re-investing your cash.
2. Lower Long-Term Interest Rate
The other primary reason for getting a cash-out refinance is to lower your interest rate. Having made payments and built up equity, you have fulfilled your financial responsibilities. We are more likely to give you a lower interest rate.
A previous lender might have only allowed you to qualify for a distressed commercial investment property at inferior financing terms. You might have improved the property and you want to recover some of your investment. A cash-out refinance can help you improve the terms and conditions of your loan.
You also should look at the overall environment for interest rates. If interest rates are falling, then a cash-out refinance makes more sense.
Commercial Property Eligibility
We will discuss the primary factors to be considered. Each lender differs on the exact requirements of commercial investment property cash refinance. It also depends on how your previous financing was structured.
In fact, some Small Business Administration (SBA) loans do not permit cash out refinance. Here are the primary factors for determining the types of commercial investment properties eligible for a cash-out refinance:
- Ownership Time
- Property Appreciation
- Unit Number
An eligible commercial cash-out refinance investment property may need to satisfy higher qualifying thresholds than a residential property would.
Some lenders might require you to have equity of between 30% and 40% for your commercial investment property.
Loan to Value
Commercial real estate lenders are willing to loan anywhere from 50% and 75% of the appraised value of your investment property. Loan to Value (LTV) percentages might also be tied to how many units are in the commercial investment property.
Some lenders will establish a time limitation as to when you can get a refi – called “seasoning.” Lenders might require you to have held the property for at least six months to two years to qualify.
Net Operating Income
Commercial loans will tend to mature within 5 to 10 years, while being amortized over 30 years. Since you are required to apply for new commercial loans more frequently than residential loans (which are usually for 30 years), you have more opportunities to consider cash out refinance. Why not use cash out refi to optimize your net operating income?
According to Investopedia, net operating income is the “valuation method” for income-generating real estate – equaling “all revenue from the property minus all reasonably necessary operating expenses.” This is a pre-tax figure that “excludes principal and interest payments on loans, capital expenditures, depreciation and amortization.”
You can use cash to stabilize or increase the NOI. By increasing your net operating income, you increase the long-term value of your wealth portfolio. We use your NOI to judge the value, risk and viability of your commercial investment property.
While property appreciation can be useful for qualification, it might not be necessary. Property appreciation allows you to gain more benefits from cash out refinance.
We will require you to submit financial documentation, so we can get a good understanding of the characteristics of your property. This is a key factor in the eligibility of your commercial investment property cash our refinance. Here are some of the documents that might be required:
- Income & Expense Statements
- Capital Improvement Summary
- Tax Returns
- Property Details
A stable or growing NOI increases your chances of qualifying. Usually, we don’t include capex or any non-recurring expense in our NOI underwriting analysis. Have you replaced equipment, renovated or upgraded the property?
Take photographs of the interior and exterior. We may also require personal financial statements and a schedule of real estate owned by the key principals. We also require two years of personal and business tax returns.
Your commercial property summary will includes detailed information including your credit rating, property type, age, value and condition. Eligible commercial investment properties will have the highest long-term stability, viability and value.
The unit number of the commercial investment property might be an issue with respect to the LTV. Some lenders will not provide cash out refi on commercial properties with more than 4 units.
Commercial Cash Out Refi Requirements
A commercial cash out refi can be beneficial in helping you establish a higher confirmed value for your property. You might have made some renovations and want a better financing deal. There is a potential cash refi multiplier effect too – you can make a renovation, take cash out for more renovations, increase your net operating income and increase your property value.
Commercial investment property cash our refinance can be a very useful technique for wealth building. Increase your cash flow and use the liquidity wisely to increase your investment portfolio. If your type of commercial investment property is eligible for cash-out refinance, you have a very powerful wealth building tool.