Refinancing your existing loan on a commercial property provides you with the ability to adjust your loan terms so that they are more advantageous for your current needs and goals. If interest rates have changed dramatically since you set up the original loan, you may be able to qualify for a lower interest rate. Adjusting the loan term is also a possibility through a commercial loan refinance. Depending on the property type and other important factors, you may qualify for a term that ranges between 15 and 30 years. Adjusting the term on your financing may help you to achieve specific goals, such as faster debt reduction or lower monthly payments.
One of the more common reasons why investors choose to apply for a refinance loan is to pull equity out of their property. When you cash out refinance a commercial property, you may tap into your property’s equity and use the money for property repairs and improvements, a down payment on another investment property or something else. While refinancing a commercial property is similar to refinancing a residential property in many ways, this is typically a more detailed and lengthy process. Furthermore, there are a few additional factors that you need to understand and review so that you are prepared for the refinancing experience.
Define Your Needs
Before you begin the process to cash out refinance a commercial property, you need to define what your specific needs are. For example, what do you plan to use the money for, and how much money do you need to achieve the goals? Analyze the property’s operating numbers carefully. What is the maximum loan payment that you can realistically accept without putting the property’s operations at risk? While a straight rate and term refinance on a commercial property may yield a lower monthly mortgage payment, a cash out refinance may yield a similar or higher monthly payment. This is because the requested loan amount may exceed the original loan amount. Interest rates may also be slightly higher than what they were when you set up your original loan.
By defining your needs as well as your limitations up-front, you can better analyze the options to determine if refinancing is a smart move to make. This important step can also help you to determine which loan program is more strategically advantageous to you based on your unique needs and goals.
Research the Costs
In order to determine if it is reasonable to cash out refinance a commercial property at this time, you need to estimate the loan costs. Understand that the exact costs will vary based on the loan program, lender, mortgage broker and other factors. However, estimating the costs up-front can help you to determine if it is reasonable to pull out the desired amount of equity from your property. Some costs may be paid up-front, but many will be rolled into the loan and paid for through the cash out proceeds at closing.
Most lenders will require a new appraisal and a property inspection. Depending on the property type and location, a seismic study, environmental report, termite inspection and other specialized reports may also be required. These expenses are most commonly paid for up-front. Some of the more typical costs paid at closing are prepaid taxes and insurance, title fees, survey fees, lender and broker original fees, recording fees and more. It is reasonable to estimate approximately two to three percent of the requested loan amount for closing costs, but this can be much higher if the lender requires more specialized reports.
Depending on the type of commercial property that you own, the operating numbers and your credit rating, you can typically expect a cash out loan program on a commercial property to offer between 60 to 75 percent of the property’s current value as a loan amount. With your estimate for the property value and closing costs as well as with a payoff figure for the current loan on the property, you can estimate the amount of cash out proceeds you may expect to obtain. This will give you a fairly realistic idea about the benefits associated with requesting firm lending quotes.
If you have decided that your preliminary analysis of closing costs and estimated net proceeds from the cash out refinance is advantageous, you are ready to begin requesting quotes. Some investors find that it is easier and more efficient to hire a skilled commercial mortgage broker for this step. A mortgage broker can shop around for you and provide you with several different quotes for you to review and compare. If you hire a mortgage broker, ensure that you select a broker who specializes in commercial properties. The variations between residential and commercial financing can be significant in some cases, and you will benefit from the expertise of an experienced commercial broker.
You can also request loan quotes yourself. Some lenders will give you a ballpark quote over the phone, but most will review an initial lending package that you provide. You can assemble a PDF document that includes your credit report, your personal financial statement, operating numbers for the property for the last few years, a lease summary or rent roll of the property and even several photos of the interior and exterior of the property. The lender will require additional documentation from you later, but this basic information will help the lender to determine its interest and to better price your loan request.
Explore Lender Requirements
With residential loans, you may find that most lenders require the same documentation, but this is not the case with a commercial loan. Some lenders only want to see one year of operating numbers on the property, and others may ask for three years of numbers. Some may require you to have lease terms that extend for at least 12 more months, and others may accept month-to-month leases. These are only some of the variations between lending requirements. Inquire about specific major lending requirements when you are requesting quotes. This may help you to avoid the frustrating experience of proceeding down one loan path only to discover that your loan request does not meet that lender requirements.
Analyze the Pros and Cons
Select the two or three leading quotes that you have received from lenders or via your commercial mortgage broker. Analyze the total lending costs that were quoted. Focus on the net cash proceeds that you may reasonably expect from the loan program. In addition, explore the estimated new mortgage payment and lending requirements for each program. By focusing on these factors, you may be able to better determine which commercial loan program most closely meets your needs. In some cases, however, you may decide that it is better for you to wait to cash out refinance a commercial property.
As you analyze the quotes, create a projected operating statement for the property based on new loan terms. Also, review your finances to ensure that you can afford to pay the up-front lending costs. Remember that many lenders require you to document at least three to six months of the principal and interest payment based on the new mortgage payment after closing. This is not usually a problem with a cash out loan because the cash out proceeds may be used for this purpose. Nonetheless, you should still focus on this requirement to ensure that you can meet it.
Prepare the Documentation
Many lenders will begin the lending process as soon as you pay for upfront loan costs, such as the appraisal. The appraisal is typically ordered through the lender, so you may need to pay the lender this fee as well as application fees or other up-front fees. At this time, the lender may provide you with a checklist of items that may be required to submit the loan request to underwriting. Some applicants may be overwhelmed by the lengthy list of documentation that is required. However, you may be able to pull this documentation together within a day or two with proper effort. Bank statements, divorce decrees, business documents if you are self-employed, explanations for derogatory credit items, copies of all leases on the property and more are commonly required. By sending the lender all required documentation promptly and at one time, you may ensure a faster and smoother lending process.
Be Patient and Responsive
After you have spent a considerable amount of time researching loan programs, crunching numbers and assembling all of the documentation that your lender requires, you understandably may feel as though you can sit back and wait for the loan to be processed. However, it is common for your loan processor or underwriter to come back to you with requests for additional documentation or explanations. This is usually because the information that you provided triggered additional questions or concerns. This can be a frustrating experience, but you should be as patient and responsive as possible. Remember that the lender is just as motivated to finalize your loan request as you are, but it needs the additional documentation in order to do so.
If you have plans to cash out refinance a commercial property soon, you can see that this can be a lengthy process. Each of these steps serves an important purpose, so you should spend ample time walking through each step individually. Your effort may be well-rewarded by your ability to walk away from the closing table with a large amount of cash in hand. This cash may be used to fix up the subject property or for future investments. When used strategically, this cash could help you to take your net worth to new levels. You can begin walking through the preliminary steps today to explore the options available to you.