Is Refinancing to Purchase More Properties A Good Investment Strategy?

Often times it can be easy to get overwhelmed by the amount of resources and advice that is available to us at the click of a button. That is why it is crucial for you to be informed by the right sources and think logically when it comes to taking anyone's real estate advice.

"Misinformation and fear of the unknown can be the culprits of success." - FG

If you own commercial real estate or are planning to invest in the future, knowing this one topic in depth can make the difference between having multi-million dollar assets.

There are the kind of investors that hold a commercial property even after its mortgage has matured and the benefits of a property have reached its peak.

Refinancing can be an extremely impactful leveraging tool, if used correctly. As you continue reading, you will become knowledgeable about the right parameters regarding refinancing and what guidelines you should use to determine whether it is a viable option for your property.

The first and most important rule of thumb is to NEVER go into debt for a new property if your current property cannot afford a cash-out refinance.

When you refinance a property, depending on market conditions, the monthly payment and terms of the loan will probably be higher than what you originally financed it for.

This means that if your current property is barely getting by, it is not smart for you to refinance for higher loan terms just to get a cash-out and purchase new property.

On the other hand, if your current property has at least a 75-80% break-even ratio, then you might consider cash-out refinancing as a means of acquiring new commercial property.

As I have mentioned before, the break-even ratio is calculated by taking the total of your monthly property expenses including loan payments and dividing it by the monthly gross income or potential income.

After a property has been paid off 40-50% of the way, you can start to think about refinancing. So long as your break-even ratio stays below 75-80% and the new terms of the loan don't affect your DSCR (Debt Service Coverage Ratio).

Formula 1: (Monthly Property Expenses + Loan Payments) / (Monthly Gross Income) = Break-Even Ratio

Formula 2: (Net Operating Income / Total Debt) = Debt Service Coverage Ratio

Always make sure to meet with your commercial loan originator to work out the details of what your financials look like and whether they are able to withstand an increase in loan amount from the cash-out refi.

Having a team you can trust is crucial in allowing you to uncover the right opportunities. Opportunities that have to be made through connections, knowledge and prior experience.

A trusted commercial real estate broker and loan originator will let you uncover opportunities for a cash-out refi, find a new property to put your equity into, a refinance that property as well.

If you have any more questions about this process and would like to get in touch today, please do not hesitate to call 305.924.5864