What are the pros and cons to pulling out a line of credit on a building versus refinancing? Wouldn't refinancing be more beneficial since you can individually pocket some of the funds tax free? I am aware that refinancing increases LTV and mortgage amount but I believe you can still take some home. Would anyone please offer their two cents for a scenario like this because I know of companies that have both a LOC and refinance. Just trying to specially understand when it's best to do one or the other. With a LOC, you're able to purchase properties more attractively, but isn't that the same condition with a cash out refinance? Thanks.
@Yaya Y. I have and use both types of financing and I think that is true of most companies and larger investors.
The decision for which to use depends on several things.
First, what are you wanting to use the proceeds for? You should match the Loan type with the use of funds.
Lines of Credit are really useful for short-term/temporary needs. For instance, I have one line I use to flip houses. I don't keep a balance on it unless I am flipping a house or commercial property. Then when I find a good deal I can move very quickly. I can close immediately (at foreclosure auction) or in a week on a private sale. Sellers look really favorably on an offer where you say you can close in a week for all cash with no contingencies.
One reason for not putting longer term investments on lines though is keep in mind that a lot of investors got in trouble in the 'Great Recession' when banks shut down their lines. Always think about your lines in terms of what you would do if the banks shut them down tomorrow.
One advantage of lines though is sometimes you can get them with no collateral or in a higher LTV position than permanent financing.
So for instance let's say you own a commercial property worth $1 million that makes $100k per year. A bank might extend you an unsecured commercial line just based on the fact that you have cashflows coming in from the property. Or if you have a permanent loan on the property they might give you a line secured against the equity in to property above the permanent financing.
A regular commercial loan is going to be better if you have more long term investments in mind. For instance if you own the $1 million property free and clear and want to borrow out a half million to invest in other real estate, definitely do a refinance into long-term commercial financing.
Both ways of borrowing the proceeds are tax free.
All this said, THE MOST IMPORTANT THING is just to make sure you watch your overall leverage/loans you have against the total value of your assets.
Just because you can borrow money against the property doesn't mean you should. I always try to look at the total cost of the financing versus what I'm expecting to earn on what I will invest it in. You mention 'taking money home'. Don't do that if you're just going to spend the money on a vacation or a new car. But if you can borrow out equity at 5% and are reasonably certain you can earn 12% in other real estate deals do that all day long.
Jeff, thank you for that thorough response. That was exactly the answer I was seeking. Your examples definitely make sense in regards to when to use both of the options. I will definitely take that into consideration moving forward.
Once again, thanks!
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