Cash-Out Refi a Commercial Property?

2 Replies

I own a single tenant commercial property that I bought 15 years ago is now owned free-and-clear. It is in a hot area and has since appreciated 5-6X since I bought it. CAP rates in my area are fairly low (4%) so it is not spitting off the cashflow I could get if I pulled some equity out and reinvested. This is what I am considering.

At this stage in my life, I am debt free but am thinking of picking up debt as I have too much net-worth in one spot and I am not using any leverage. My local bank offered me a cash-out refi at 4.9% on a 7 year ballon/30 year amortization. I am considering taking this and using the funds as down for one or two multi-families or do some note investing and arbitrage the difference between the bank rate and the note yield. I would be taking out approx 30% of the equity so would not be over leveraging.  First, any thoughts or suggestions so far?

Also, I think rates are still very low so if I am going to do a cash-out refi at some point, now might be the right time (lest year would have been better).Thoughts?

Lastly,  I would not want to have pressure to reinvest until I find the right opportunity but will have those lofty monthly bank payments.  Are there any safe, short term places to park a nice sum of money in todays market that can come close to or exceed providing 4.9% return? My assumption is no, but I want to test that idea with y’all.

@Jon D. I generally like your strategy. I would however study up on "maturity risk" and financial history when players took long term bets with short term money. Punchline, your cost of capital surpasses the yield on the new investment.  

Perhaps you can time the cash out refi with an acquisition opportunity?

If it were me I'd need a rock solid income property with almost zero downside and high DSCR on the 7 year note. Will the lender give you 10 year (push out maturity risk farther into the future) note for a little higher interest?

Lastly, it's hard to give advice when I'm not familiar with the underlying credit of the single tenant property. That's another big variable.

I have hopefully created more questions than answers but that's my intent. Not knowing what you don't know will kill you in real estate! ;)

All the best man!

Thank you for your time and thoughts!

It does seem better to go for a longer payback period. I will definitely look at that option. 

I have been considering waiting to cash-out refi until I have a well defined opportunity or use for the money, but also want to take advantage of the historically low rates.  I am not sure if I should put such weight on a threat of rising rates?

If you are asking the credit question to assess my threat of vacancy, the property is a single-tenant retail building in a high-foot traffic downtown shopping district in a high-income, densely populated coastal community.  The tenants are a small medical business that have been there for 10+ years on a series of 2-3 year NNN leases. They have great personal credit but just a local business. With that said, historically my risk of having a long lasting vacancy is very small. In the 15+years I have owned the property, we do have periods of 2+ years where there is not vacancies(available spaces) in the immediate shopping district), then suddenly have a period where a bunch seem to pop up at once. But all are re-rented in a few weeks at a rate much higher than I am currently charging. So I sleep fairly well at night. That said, none of us really know what is waiting for us around the corner!

Thanks again for your comments.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you