How to Refinance Your Investment Property
Written by Julia Ribeiro and Marisa Marulli (REMCO Communications)
Reviewed by Lisa Gerard (REMCO Founder and Principal)
January 5, 2021
You may be familiar with home mortgages or car loans, where the debtor usually gives a down payment followed by incremental payments until the loan is complete. Commercial real estate is different when it comes to loans; in addition to the down payment and fixed monthly payments, most commercial real estate loans require a large-batch payment known as a balloon payment.
With shorter loan terms and large incremental payments, many investors opt for refinancing their commercial real estate loans.
In this article, we will review the benefits of refinancing a commercial real estate property and how to get started.
How Does a Commercial Real Estate Refinance Work?
Commercial real estate refinancing is similar to any other loan, in the sense that it involves incurring a new loan to pay off a previously existing loan.
Investors typically refinance a loan to: negotiate better terms, lower interest rates and monthly payments, make improvements to a property’s equity and prolong balloon payments.
Benefits to a Commercial Real Estate Refinance
Negotiating Better Loan Terms
There are a handful of different loan terms available in the market, with conditions varying from fixed-rates to variable interest rates, accelerated to traditional turnaround times and short to extended mortgages.
Lower Interest Rates and Monthly Payments
A key driving factor to refinancing a mortgage is to lower interest rates on a property and consequently shorten or lengthen (depending on the investor’s goal) the mortgage payback period.
Improving Property Equity
Equity is the difference between the value of a property and the amount that is owed on the property’s loan. One way to increase equity is by refinancing a loan: When an investor has the property’s interest rate lowered, their equity increases as their debt decreases.
Avoiding Balloon Payments
In commercial real estate, balloon payments are large amounts of money remaining from a loan which needs to be repaid in full. There are two main types of balloon payments: interest-only balloon schedules and balloon schedules with principal payments.
In the interest-only balloon schedule the debtor pays monthly fixed rates that only cover the interest on the principal (original amount of the loan). The incremental payments on this loan are usually smaller and include a large balloon payment towards the end of the loan (the full amount of the principal is due).
Now, the balloon schedule with principal payments, allows the debtor to pay off a portion of the principal, alongside interest with the incremental payments. This type of loan consists of higher monthly payments but also features a smaller balloon payment, since the principal amount was partially paid for throughout the loan.
Throughout the process of refinancing a loan, balloon payments are often prolonged, leaving investors with larger cash flows for additional investments in the short term.
Requirements for a Commercial Real Estate Refinance
Once you are familiar with what type of loan suits your investor profile, it is important to understand the requirements for a commercial real estate refinance.
Here are some items to consider when applying for a commercial real estate refinance:
Business Credit Score
Commercial real estate lenders will look at a business credit score rather than your personal credit score, and chances of approval are higher with a larger score. The Small Business Administration (SBA) usually requires a business credit score of at least 155 out of 300 in order to qualify for a loan.
Net Operating Income
A net operating income value provides investors and lenders with not only a grasp on a property’s expenses, but also its revenue and net income potential. Lenders look for debtors with a good NOI value, and requirements will vary depending on the lender and the loan type.
Waiting Time Between Finance and Refinance
Many loans require the debtor to wait a certain amount of time before refinancing. This can often be required when planning on a cash-out refinance, on FHA loans or in other cases when lenders want to see a few years of business operations to verify the investment is stable.
Personal and Business Documents
Refinancing a loan will require the same documents previously used to finance the loan. Common documents requested include: employment verification, business bank statements and tax returns, business operating statements, commercial real estate schedules, holdings and more.
Closing Costs
During the process of refinancing, the debtor will also incur closing costs that generally range from 2% to 5% of the loan principal. Although, there is an option to exempt from paying the closing costs upfront by including it to the incremental payments. However, in this case,you will likely be paying a larger total due to interest.
Commercial real estate investors should consider refinancing investment properties to take advantage of better loan terms, interest savings opportunities, portfolio expansion and more.
If you are interested in refinancing your commercial property, use this article as a guide for navigating the process.
