Optimal equity in a commercial property and why?

Question

What is the optimal equity you should have in a commercial property?

TL;DR version: property is fully paid off and fully depreciated; gross lease, so landlord is responsible for prop taxes; if doing a cashout refi, what's the optimal amount of equity that the property should have?

So I've done some AI searching and it seems ~35% for equity in a property is ideal for max leverage advantages. This seems a bit low to me since purchasing a commercial property requires ~40% down to get the 1.25 rent to debt coverage.

Current property is paid off. There's a 6.5 year lease on it with a couple of 5 year options. I'd estimate the property is worth around $1.4m. There is no more depreciation on the property, it's fully depreciated. So there aren't a lot of deductions.

My thoughts are:
-pull $500k out @ 6.5% with a 10/25 loan
-monthly interest payments would be around $2700 which would give me $32.4k of deductions annually
-Take the $500k and either invest it into the stock/bond market or purchase another property (TBD)
-If we assume $500k returns 6% annually via the market, that's about $30k annually (not accounting for compounding etc)
-my net is a neg $2.4k annually, at least in year one. But after year 1, my net should be positive with compounding

-if we take the $500k for real estate, we'd get new depreciation to offset all the rental income for awhile with a cost segregation; I'd need to sit down and do more math here.

At the end of it all I care is that the net income from pulling out $500k is greater than leaving all the equity in the property. It seems that the equity sitting in the property is just sitting there doing nothing, not even collecting at CD/money market rates.

This might be a difference as well. In this particular instance, I expect the income tax rate to be 12% for 2026.

-if we take the $500k for real estate, we'd get new depreciation to offset all the rental income for awhile with a cost segregation; I'd need to sit down and do more math here.

At the end of it all I care is that the net income from pulling out $500k is greater than leaving all the equity in the property. It seems that the equity sitting in the property is just sitting there doing nothing, not even collecting at CD/money market rates.

This might be a difference as well.  In this particular instance, I expect the income tax rate to be 12% for 2026.

Greg Scott · Answer

There really is no "optimal" amount of equity or debt.  It really depends on your personal investment philosophy.

For me, I never want to have a paid-in-full property.  They are targets for fraud and ambulance chasers, and often times the equity is under-performing.  I'd rather have two properties at 50% leverage than one paid-in-full.

Having zero depreciation left on the property means the tax man is taking a huge bite out of your returns.  Have you considered doing a 1031 into something else?  Moving to a new property would likely improve your total returns dramatically.

Dominic Mazzarella · Answer

I’d think of it less as “how much equity is optimal” and more as “what does the property safely support, and do I have a better use for the cash?” At 6.5%, I’d want a very clear plan for the money before pulling it out. The interest deduction helps, but you’re still paying the interest, so I wouldn’t treat that as a win by itself.

If the $500k is going into another deal with real upside, depreciation, and a strong risk-adjusted return, that can make sense. If it’s just going into stocks/bonds because the equity feels idle, I’d be more cautious. I’d also run this by a CPA since the property is fully depreciated. The tax side may matter more than the simple “borrow at 6.5% and earn 6%” math.

Henry Clark · Answer

OP.  Provide more info for a better response.

Example:

1.  Your retired and drawing social security and using the rental for living.  Don't refinance if your Commercial loan has a 5 year balloon and your think interest rates will go from 6.5% up to 13%.

2.  Is this a 4 plex sitting on 3 acres of ground?  Can you use your equity and build another 4 plex?

3.  Is this an Industrial building sitting on xx acres.  Can you lay some rock down and rent out Semi/Construction equipment parking.

4.  Don't take a loan out unless you know what your going to do with the cash.  You might get a Working Line of Credit so you are prepared to do a deal on a Distressed property or situation.

5.  What is the expected Capex items on the existing property and estimate?

6.  What business is the current renter in?  Even with a 6.5 year remaining lease, doesn't matter if their business isn't there. Example are they a Shoe store, retail, garage, etc.

7.  Have you thought of selling to the current renter?  $700k out with a $700k note at 7% interest.  NNN.  Escalation clauses if Insurance or property taxes not current.  Buy Back options at 80 % value if property not maintained.  "Additional Insured" on their insurance.  Etc to protect your value.  Payoff clause if they sale or take an additional loan against it.

8.  Etc Etc.

Ronald Rohde · Answer

Pulling 50% seems fine, but just have a deal ready for that capital

Optimal equity in a commercial property and why?

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