The benefits of cash-in refinancing for commercial properties


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If you’ve spent any time learning about real estate, you’ve probably seen the term “cash-in refinance.” This concept is very popular in residential real estate because banks market it as a method of getting money to pay for vacations, repairs, renovations, or whatever you want. However, you may not know that you can also do one of these refinances in commercial real estate. What, exactly, is a cash refinance in the world of commercial real estate, and why would you want one? Keep reading to find out!

Cash refinance for commercial properties

Whether you are looking to buy a single family home or a multi-million dollar commercial property, the basics of mortgages remain the same. There is a property that will secure the mortgage that has a certain value. Mortgages provide a certain percentage of this value to purchase the property. In most cases they will provide up to 80% loan to value (meaning the bank will lend up to 80% of the value of the property and the buyer will have to pay the remaining 20% ​​as deposit).

You reduce your balance with the lender as you pay off the mortgage. You also reduce the loan-to-value ratio (LTV) whether the value of the property remains the same or increases. For example, if you borrowed $800,000 to buy a $1 million property, you would have a loan to value ratio of 80%. You pay $100,000 on that mortgage and the property is now worth $1.4 million. Your LTV is now 50% ($700,000 balance / $1.4 million valuation).

Continuing with this example, if your bank lends up to 80% LTV, you can “cash in” that extra capital by doing a cash refinance. You would essentially wipe out the old loan of $700,000 by getting a new loan of $1.12 million (80% of $1.4 million). The excess $420,000 would be yours in cash!

The way it works for commercial properties is the same as for any other type of real estate (eg single family homes). Having a cash refinance can be very beneficial for real estate syndications with commercial properties. Indeed, there are three main reasons why syndications will do this:

Related: 5 Ways to Make the Most of Commercial Property

1. Tax-free financing for capital expenditures

Once you have equity in the commercial building or have successfully increased its NOI so that it has a higher valuation, you can withdraw some of that equity to fund capital expenditures. You may want to perform significant value-added real estate upgrades.

You could, in theory, wait for the rents to fund your company’s bank account to the point where you can do it with cash. Or, you can take out the equity and make the upgrades to get higher rents faster. These higher rents will increase the valuation and allow you to sell the building much faster and with less risk than waiting to build up your fund. Plus, rental profits are taxable – but withdrawing equity is tax-free!

2. Repay investors faster

The goal of everything syndicator in a real estate syndication is to repay investors as quickly as possible. Returning investors’ money is an important goodwill gesture and will make them more likely to reinvest with you. Plus, that’s what you, as the trustee of their money, are legally required to do. You can return money to investors through a cash refinance and reduce their overall risk.

Related: Learn how to invest in real estate with confidence

3. Avoid lump sum payments

Commercial real estate loans generally mature much faster than residential loans. You may be considering a loan that matures in as little as two years. Suppose you do not have the funds to repay this loan. In this case, a cash refinance can help you in two ways: change the terms of the loan (better interest rate or longer term, perhaps) and give you operating funds, including an extra cushion to make mortgage payments.

If you are looking to avoid a lump sum payment, you must refinance before the loan matures (even if you are refinancing without a withdrawal option)!

A detailed example

To illustrate the power of cash-in refinances, consider the following detailed example:

Say you’re starting a commercial real estate syndication that wants to buy an apartment building for $10 million. You raise $3 million in capital and get an $8 million business loan. As the market is not very good, it is a loan at 5% interest and only for two years. However, this loan allows you to buy the building, so you take it.

With your remaining capital of $1 million, you set to work renovating the building. You can renovate 20% of the units with that million dollars, and over the next 18 months you can increase the overall rent by about 10%, including significant increases for renovated units.

However, your lump sum payment is due. Since you increased the rents by 10%, your building is worth more, say $11 million. And in those 18 months, you’ve repaid $1 million of the loan, so you only owe $7 million.

So instead of selling the building, you do a cash refinance. Eighty percent of the building’s equity is $8.8 million, so you’re withdrawing $1.8 million ($8.8 million – $7 million owed) for two years at 5 %. With that $1.8 million, you renovate another 40% of the units, increasing the overall rent by 20% this time.

After 18 months, you’ve been in this building for three years. Most syndications last five, so you do an additional rollover. The building is worth $13 million, and thanks to increased rents and reduced expenses, you’ve paid off $1.8 million in mortgage. Eighty percent of the building’s equity is now $10.4 million, and you owe $7 million. You’re doing a cash refinance of $10.4 million, with $3.4 million in cash, but the rates have gone down, so this one’s only at 3%.

With that $3.4 million, you can take half of that and renovate the remaining 40% of the units to raise the rent another 20%. The other half, $1.5 million, can be used to repay investors almost all of their capital nearly two years earlier!

Finally, the two-year loan comes to an end. You sell the building for $15 million, 50% more than you originally paid. The loan balance is now $8 million because it was easier to pay it off with the lower interest rate and higher rents. You can take that $7 million profit and distribute it to investors.

Related: Learn the Fundamentals of Long-Term Real Estate Investing

This example shows how powerful these refinances can be! By using the money to improve the building, this hypothetical syndication could increase valuation while returning money to their investors sooner. And they did it while avoiding lump sum payments and lowering their interest rate!

A cash refinance is a powerful tool for commercial real estate. It provides investors with tax-free cash that they can use in a number of ways to pursue their real estate goals. Assuming you can get a low interest rate on your refinance, take a look to see how this concept could improve your investments. Check your mortgage balances against their home equity and see if there is a way to refinance a cash out that could benefit you!


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