Commercial property refinancing is a great way of unlocking the equity in a property and saving on the increased interest costs by taking up a new loan with better terms. Experienced and savvy commercial real estate investors often refinance their commercial real estate loans to avail the various benefits of doing so.
As a beginner, it might not make too much sense to refinance your loan and your pros might not be convincing enough for you. But in the long run, commercial property refinancing can indeed be a great way to enhance your chances of real estate investment success. Besides, in situations where you cannot afford to pay up the large balloon payments that are due at the end of a loan term, commercial real estate property refinancing might be the best solution. This blog is an overview of all the things you need to know about commercial property refinancing.
What is commercial property refinancing?
Commercial property refinancing is the process of replacing an existing mortgage with a new loan that has better terms and rates, to leverage on the lower rates and decrease the upfront monthly payments that are made towards paying off the loan liabilities.
There are various reasons for an investor to refinance their existing commercial property loan. Working with experienced commercial real estate loan lenders will give you enough evidence on why commercial property refinancing might be the best answer in certain cases. Here are a few good reasons why savvy commercial real estate investors consider refinancing their commercial property mortgage (and why it might be a good idea for you too!)
Reasons to refinance your commercial real estate mortgage
1) Lower rates
The one big reason why investors consider refinancing their commercial real estate mortgage is the lower rates that are provided in the loan. Investors might be interested to lower their overall monthly out-of-the-pocket expenses concerning paying off their loan liabilities like interests. Thus, a smart commercial real estate investor is often on a lookout for commercial real estate loans that offer better rates.
A significant decrease in the monthly payouts might not be very large when compared for a small period, but it can save up large costs in the long run. The saved up costs can thus be directed towards other real estate ventures.
2) Switching from adjustable rates to fixed rates and vice versa
Another reason why commercial real estate investors consider refinancing their commercial real estate mortgage is to make a switch from adjustable loan rates to fixed rates. An investor may be interested to switch from varying rates loan to a fixed-rate loan because he wants to avoid the ambiguity of how much cash outflow he needs to expect at the end of every month towards loan liabilities. On the other hand, an investor might consider switching from a fixed-rate loan to an adjustable-rate loan as he or she may wish to leverage by the varying interest rates that allow them to save up on the interest costs when the market has low-interest rates. Thus, depending on the preference of the investor, making a switch might be a good reason to refinance the commercial mortgage property.
3) Longer loan periods
A new loan that has a long term period is another good reason to refinance your commercial property mortgage. Longer terms mean lesser loan liability towards the clearance of loan amount every month and for an investor who is struggling with monthly payments, this could be a great option!
4) To avoid large balloon payments
Most commercial real estate property mortgages come with the balloon payment clause where borrowers are required to pay up a large lump sum as a balloon payment at the end of the loan term. Now, some investors might not be in a financial position to take this expense up and want to avoid this payment.
In such cases, choosing to refinance your commercial mortgage will give you the benefit of avoiding such large balloon payments. In some cases, even when an investor does have sufficient funds to pay off the balloon payment, they choose to dodge it as they plan to utilize their funds in a better way by directing them towards more profitable ventures like a business or another real estate investment opportunity than just pay off an existing mortgage.
5) Taking cash out on refinancing
Cash-out Refinancing is a type of commercial property refinancing where the investor will choose to unlock the potential of the equity they own in the property by refinancing it. This surplus funds generated will allow the investor to reinvest it in the property to make repairs and renovations or remodeling of the property and thus justify an increased rent demand from the tenants. This will enable the property investors to not only charge higher rents from the tenants which will increase their monthly cash inflows consistently but will also add value to the intrinsic property value of the commercial real estate property.
What are qualification requirements to be met by a borrower to qualify for commercial real estate refinancing?
Just like any other loan, commercial real estate refinance mortgages have similar qualifying standards that are designed to check the repaying ability of a borrower. As long as the lender is convinced and satisfied with the lender’s repaying abilities, refinancing a commercial property mortgage is not a difficult task. Here are some qualification requirements that need to be met by a borrower to qualify for a commercial mortgage refinance.
#1 – A good personal credit score
It goes unsaid that the first thing commercial real estate loans lenders look into when considering a loan proposal is the personal credit score of the borrower. The personal credit score determines the nature of a borrower, how he spends and how determined and loyal he is towards clearing off his loan dues on time. Income statements relating to a period of 2 to 3 years along with tax returns and other documents to back them up are some general documents you need to keep ready before approaching your lender.
#2 – A good business credit score
Over and above the personal credit score, lenders are also interested in knowing the business credit score. Some borrowers may not have a great lending history and a great personal credit score but might have an exceptional business credit score. Lenders would be happy to refinance the loan of a borrower who runs a good business that has an attractive credit score. At the end of the day, lenders are most interested to understand that a particular borrower will pay up on time and as long as the borrower can convince the lender of this fact, either through a good personal credit score or a business credit score, lenders are happy to lend.
#3 – The Net Operating income of the business
Lastly, lenders consider the net operating income of the business owned by the borrower. There may be cases where a borrower might suffer from a poor credit score because he or she defaulted on making a few payments on time due to poor financial circumstances that existed before. However, a business might have taken the plunge and might be doing great at present generating a lucrative income. Thus, lenders look into how much a borrower is making from his successful business and if it’s convincing enough, a poor personal or business credit score will be given less importance.
What to look for in a lender while considering commercial property refinancing?
Whether you choose a traditional lender or a private commercial real estate lender to refinance your mortgage, it is important to choose someone after you fully understand how they refinance your loan. Most investors work with a selected set of lenders with who they already have a good relationship.
Asking around in your circle of friends and family about the best lenders to work with for your commercial real estate mortgage refinancing can give you leads on who you can approach. From there on, you must do your part of homework and research to understand their loan terms and conditions, along with any kind of costs that may be associated with the process of your loan approval.
Make a note that you discuss all the possible costs associated with your loan upfront with your lender and have no cost come to you as a surprise. Take note of closing costs, legal fees to process loans, prepayment penalties of any sort and all other types of loan costs before you close your loan agreement.
Typically, you should look for a lender who has a fair share of experience in commercial real estate loan refinancing. This experience will also work out in your favor as your lender will be able to guide you through the process carefully and also advise you on making some important investment decisions thereon. Building a good rapport with your lender can come a long way and can impact your long term real estate investment success.