What is a Cash-out Refinance in Commercial Real Estate and Its Advantages? – Lee Chandler

It is always important for any investor to have a good exit strategy when it comes time for that investor
to move on or wanting to get some cash out from that particular investment. Any investor will want to
maximize their potential profits and choosing the correct exit strategy can play a key role in this. There’s
lots of different exit strategies in commercial real estate, however, a cash-out refinance of a property
provides an investor with a way to get cash out from their property, while also providing other
advantages over more common exit strategies.

What is a cash out refinance and how does it work?
A cash-out refinance can be defined as when you refinance your mortgage by taking out a new loan that
is more than the outstanding of the previous one and using those funds to pay off the old mortgage,
then cashing-out the difference. With this method, you can take out equity from your property and
convert it to cash. One important thing to note is that depending on the lender you use, there may be
restrictions placed on what you can use the extra cash for. So it is important that you find a lender that
has no restrictions or has restrictions that align with how you want to use the extra cash.
For example: If you have a $1,000,000 mortgage on a property and have already paid of $500,000, this
means that you have built up that amount in equity in the property. To convert that equity into cash,
one would take out a new loan of $1,000,000, pay off the outstanding loan of $500,000 and pocket the
rest. The nice thing is that this cash is tax free.
This article by Investopedia.com gives a great explanation on cash-out refinancing:
(https://www.investopedia.com/terms/c/cashout_refinance.asp)

Advantages

As previously mentioned, cash-out refinancing gives an investor some advantages over more common
exit strategies. Firstly, it gives you extra cash to use as you would like without having to outright sell
your investment. You get to keep your property and the income that it is generating, but will still be able
to take out equity and convert that to cash. The great thing about this is that this cash is tax free. Unlike
when you outright sell a property, with a refinance you will not have to pay taxes on the equity that you
take out of the property. The last two advantages are potentially getting lower interest rates and better
loans terms.

A cash-out refinance can be a great option on your property. If you want or are in need of extra cash,
doing a cash-out refinance can be better than just outright selling your property as you can take out the
equity but still keep the benefits of your investment.

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