Leveraging Commercial RE to Buy More

[Nate Miller]

Hello everyone! 

I bought a commercial building back in fall 2021 and I have a good amount of equity in it. That is the only building I own currently, but I would like to get some ideas on how to leverage the property to buy more real estate. What are some options that I have?
 

[Sam Yin]

Quote from @Nate Miller:

Hello everyone! 

I bought a commercial building back in fall 2021 and I have a good amount of equity in it. That is the only building I own currently, but I would like to get some ideas on how to leverage the property to buy more real estate. What are some options that I have?
 

 You already had some great suggestions. They are solid advice. I would add that you might want to consider holding for now since you only have one. If it is cash flowing well, keep it for the moment because of the market uncertainty. I would not disturb it very much unless I had a very high-paying job as well or have a lot of experience.

Here are some pros and cons

The suggestions are great and well put. You do not want to be overleveraged in this part of the cycle. 

If you refi, the current rates will eat up your cash flow and will likely not get you much... unless your current DCR is way over 2%. You are looking as doubling your mortgage interest rates, so think about it and what your CAP rate can really achieve.

If you cross collateralized and a recession hits the workforce hard, the lender might call the note if you fail their audit. Eventually, they will see that second position lein and calculate that into your DCR. But if your current DCR is way above 2%, that might be OK.

If you 1031X, after factoring in your costs, are there currently enough options in the area you are interested in that can produce close to, or potentially more than, your current cash flow with your downleg funds? Or are you just playing the appreciation game and looking for a better unit mix?

These are the questions you need to ask yourself or think about.

I did about seven 1031X in the last 24 months. I am in the middle of one now on an apartment I purchased mid 2021, with 3.5% interest. I have had to exercise my 30 day extension because it's been tough to find the right upleg. My downleg was producing well over 20% ROI and just over 20% ROE. Thus it seemed like a good idea at the time. But the current market trends make it tough, especially since I was hoping to keep it in SoCal. Rates have nearly doubled. Sellers want top dollar. CAP rates and interest rates are just not jiving at the moment.

With that said, if you are a high W2 earner, those things could be mitigated. But if you are living off your one property, I would strongly suggest you hold.

Good luck.