Problem: Refinance Required in 2024-2025
Solution: Contact a broker today!
If you purchased commercial property between 2018 and 2022, chances are your loan balloons in 5 to 10 years from initiation. That means you’ve either refinanced already at much higher rates or are going to in the next 6 months to a year.
If you’ve already gone through the process and still have cash flow after interest rates doubled. Then you are doing very well indeed.
If you’re after debt service, cash flow was destroyed by the rate change or rising insurance rates. You should be considering your options. There are still Private Equity investor that don’t need loans and 1031 exchange buyers that are willing to invest at 5-6% cap rates.
If you are concerned about what’s going to happen when you need to refinance or your ARM resets. Contact me today for a free cash flow projection.
Personally, as I write this, I’m going through the very same debate.
My father and I own a duplex in Miami. We purchased the building in 2012 at the tail end of the Great Recession for $450,000. We came across the building doing research for our tax assessment appeal business. It appeared to mis-listed on the MLS by the residential realtor that posted on behalf of the lender. At this time, there was a flood of REO properties coming to market. To be fair, Zillow still mislabels the property today. On the MLS system is what showing as a 3 bed 2.5 bath town home for $450,000. In fact, it was 2 3 bedrooms 2.5 baths town homes, but one of them needed to be finished with electrical, HVAC and plumbing. Once acquired, we completed the construction for around $50,000.
For 10+ years we have rented the property consistently around $3,000 / unit / month and made modest returns.
In 2020 after a tenant stiffed us for 4 months rent, we found new tenants that have been wonderful. But then market rents went ballistic. Because they were go tenants in bad times, we’ve let them stay at below market rents for 2 years. BUT…
Now we face the dilemma outlined above. Our mortgage recasts in Spring 2025 to prime + 2%.
The math works out as follows:
| Principal | Rate | Payment |
| $330,000 | 3.25% | $1,600 |
| $330.000 | 7.5% | $2,440 |
| Difference | $840 | |
| Percent Difference | 53% |
The $10,080 doesn’t completely wipe out the cash flow for this property, but combine this with increases in insurance, maintenance, and the potential for big repair expenses, and it gets very close. I’m personally thinking very carefully about those random cold calls I get about buying the property sight-unseen from property wholesales or listing it myself for sale.
My choices, like anyone else in this situation, are:
- Sell while the market is still hot. Pay the Capital Gains. Put the cash in a high yield savings account for 5%. This would yield almost as much as we make now after debt service, but with little risk and no appreciation.
- Trade while the market is still hot. 1031 Exchange into another property.
- Hold, and let the interest eat away the cash flow, but hope appreciation makes up for it.
- Sell while the market is still hot. Pay the Capital Gains. Buy Bitcoin!
More than once I’ve heard Tony Arellano, the managing partner at DWNTWN, tell clients
Never sell great real estate!
Tony Arellano
Sometimes to our determinant as brokers. But it’s still good advice. But if you have replaceable real estate, well, that’s a different story.
Dammit. I think in writing this post, I’ve convinced my sell to list my own property. If you’re in the market, stayed tuned because you may see it come available soon!
If you are in a similar situation and want to talk through your options, call or email today, review your situation. I promise to give an honest opinion as if it were my own property.
PS. To any banker friends that might see this, I’m sorry about the featured image.
