Cash out re-fi of rental property to fund other business?

Questions on how we spend our money and our time - consumer goods and services, home and vehicle, leisure and recreational activities
Post Reply
Topic Author
Kennedy
Posts: 369
Joined: Mon Nov 10, 2014 2:47 pm

Cash out re-fi of rental property to fund other business?

Post by Kennedy » Mon Jan 13, 2020 9:41 pm

I have a project whereby I need a commercial construction loan for my new business. I spoke to a banker for a local bank that provides construction/commercial loans. She told me her bank would amortize the loan over 15 years with a rate that adjusts every five years. Moreover, there would be a 1% origination fee.

I have a couple rental properties that have been paid off for a number of years. I have no interest in selling them since I will have to recapture the depreciation as well as pay capital gains. Moreover, a 1031 exchange will not work due to the timing.

I'm wondering if a cash-out refi of the rental properties would be beneficial in my situation. I would use the money to finance part of the construction of the business in lieu of taking a commercial loan on the whole amount. The re-fi cash amount from the rentals would finance about 60-65% of the project's cost with the rest coming from a smaller commercial loan. The advantage would be that I could amortize this loan over 30 years, instead of 15, have a fixed interest rate over the 30 years (instead of adjusting every 5 years) and avoid paying the 1 point origination fee as compared to the commercial loan.

I'm assuming it would be a wash tax-benefit wise as to whether I deduct the mortgage interest against the rental income (doing the cash-out refi) or deduct the commercial loan interest from the business income (doing the commercial loan)?? In case it matters, my spouse's employment already caps out the social security income max. I'm assuming I don't have to use the cash-out refi money from the rental property to improve that rental property in order for me to deduct the interest against the rental income?

I know I won't have the rent income I currently have from the rentals to pay the construction loan, but I'm thinking I'll come out ahead that way? I believe I'll have to personally guarantee the commercial loan just as I would the rental property re-fi. What haven't I considered here?

User avatar
AerialWombat
Posts: 980
Joined: Tue May 29, 2018 1:07 pm

Re: Cash out re-fi of rental property to fund other business?

Post by AerialWombat » Tue Jan 14, 2020 1:37 am

To what LTV are you assuming you will be able to refi? Most lenders limit this to 75% on an investor loan. Also, origination fees tend to be higher on such loans -- I'm averaging 1.5% from a portfolio lender.

In evaluating your cash flow from the rentals after the refi, are you taking into consideration the significantly higher interest rates on investor loans?

Have you considered the impact of the refi on your retirement planning if the new business opportunity fails?

Just a few things to think about.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

Post Reply