Advice, Commercial RE, sell or cash out to buy another property

7 Replies

I'm Trying to give a complete picture so I can tap into this great resource of BP.  

I own a commercial property, no mortgage. Two appraisals 3 years ago $1.8MM. Raleigh NC, so unlikely to have gone down

Rent $10,400/mo (2% annual increases). Tenant is original to the building, original lease started in 2003. Current lease 2014 – 2019 with two 5 year options. Fair market rent with process in place if we can’t agree on rent at each renewal.

Landlord responsible for roof and structure only. New roof 2 years ago ($45k).

Credit score 800+. I keep approximately $75K in cash.

Made $85-100k taxable last 5 years self employed outside of CRE. Transitioning to more and more RE until I sail away.

Personal Ohio residence has no mortgage. Total debt service non business related $1K/mo. No business debt.

Looking for minimum or no LL responsibility except maybe a lease negotiation, paying loans and cashing checks.

Would you attempt to sell current property or borrow against it?  If I borrow against it:

Assumptions: 8% cap rate $1.56MM value.  It may be worth more but always trying to underestimate.

20 year amortization @ 5% (Can I get this loan fully amortized?)

Borrowing 700K - 1MM from current property leaving DSCR (ranging 2 - 1.44), Use this money as a down payment on the next and to beef up cash reserves.

Chris

Chris:

Selling would create a taxable event for you.   Unless that property just makes no sense for you any more, it is probably not the best financial decision.

A cash-out refi will likely give you $1M or more to go buy more real estate and you won't pay taxes on the loan proceeds.  It is a far better solution.

It is worth noting that on a commercial loan the property finances are much more important than your credit score.  Actually your tenant's credit worthiness will likely be more important than yours.   I would see if you can get a 25 year Am to maximize cash flow.

Consider getting a cash-out refi on your personal residence too.   If you can borrow at 5% and earn at 20%+ it is a no-brainer.

Good luck

I went with a line of credit on my personal residence works well for me give me ready cash for deals and I just pay for what i use when i use  it

@Chris Wallace What is your end game or goals for real estate? That in itself should probably guide you most toward the answer.

Thank you for taking the time to answer.

I'm not really wanting to sell although I wish it was more profitable.  Tenant has a right to buy option until the current lease runs out in 2019.


Any suggestions as to where to find the best loan rates to pull cash out?

My goals:

Additional cash flow

Paydown on the new purchase

Build wealth

Minimize taxes.

I am likely to take a mortgage out on my house due to attractive rates on 15-30  year terms for primary residence.  Writing off the mortgage interest would also be nice.

Chris,

 With a single-tenant, double-net lease situation like this, the attributes of the tenant and the lease are some of the most important pieces of information that a lender will want to understand. Based on what you've shared so far, here's where we would key in:

1. Buy Option - Can it be waived? Would the tenant agree to give it up? If so, what would they want in return?

2. Lease Options - 2019 lease expiration is something that no bank or credit union (the best rates available for a property like this) would touch. A bank needs to see a long-term, locked-in tenant, and then will write the loan term to match. Can you get them to agree to an early option exercise?

If those two items aren't worked out, your only option for taking cash out right now would be a private bridge lender. In that case, the rate would be higher, but you can potentially get an Interest-Only loan, so it would keep your monthly cash flow up.

 Happy to take a look at the deal specifics if you'd like - feel free to PM!

 - Tim

Originally posted by @Tim Milazzo :

Chris,

 With a single-tenant, double-net lease situation like this, the attributes of the tenant and the lease are some of the most important pieces of information that a lender will want to understand. Based on what you've shared so far, here's where we would key in:

1. Buy Option - Can it be waived? Would the tenant agree to give it up? If so, what would they want in return?

2. Lease Options - 2019 lease expiration is something that no bank or credit union (the best rates available for a property like this) would touch. A bank needs to see a long-term, locked-in tenant, and then will write the loan term to match. Can you get them to agree to an early option exercise?

If those two items aren't worked out, your only option for taking cash out right now would be a private bridge lender. In that case, the rate would be higher, but you can potentially get an Interest-Only loan, so it would keep your monthly cash flow up.

 Happy to take a look at the deal specifics if you'd like - feel free to PM!

 - Tim

1.  The right to buy is at 1.8MM with each year going up by 2% until the end of this 5 year term.  If I were willing to sell the property for less than 1.8MM, do you think this would still be an impediment?  Would potential buyers see this a negative?

2. PNC business banking informed me of this today as well. From their own admission they don't cater to full time CRE investors.

I think the tenant would be willing to exercise the option early with some negotiating.  Taking the term out to 6-7 years remaining.

PNC wouldn't do a mortgage to use as a down payment on my current property. They would do a business line of credit up to 75% LTV.

There's another department at PNC that focuses on commercial real estate, but I don't think they're the right lender for you here. You shouldn't worry about who you do your other banking with - be laser-focused on the right commercial loan terms if you're going to finance this to take cash out (vs. selling).

I won't be helpful on the selling front, but as per financing, yes, if you can get that early option exercise from the tenant, typically we can get lenders to more or less match the lease expiration with the loan maturity, because it eliminates that risk of an empty property leading to loan default. It would be even easier to get a five year fixed rate because it has some margin to the end of the lease - but just know, that means you'll be doing that same dance between lease extension and loan maturity again in five years (or you can choose to sell the property then).

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