If you are the owner of a commercial property, you have likely worked very hard to turn it into a cash-producing asset. Even so, you may still have a CRE mortgage loan that you make payments on each month. Did you know, however, that your commercial property mortgage, while still a debt, can actually give you the ability to buy more CRE properties, ultimately increasing your portfolio and creating wealth for you more quickly?

The ability to turn your commercial loan into a possible source of financial power lies in two key actions: maximizing the revenue that your property is generating and decreasing its expenses, which together maximize the property's market value. If you can keep this up over the long haul, you will see your own net worth increase as well.

This is where your CRE mortgage loan comes in. The financing you received for your property is just another way of saying leverage, which you can use to increase the potential return of your investment. Be cautious, however, because while commercial real estate values will work to your advantage when they rise, just the opposite can happen if they fall.

How much you can borrow will depend on different factors, including the type of CRE property you already own. Here is what you need to remember: for every dollar you invest, you are able to borrow $1.60–$1.80.

Example: you have $125,000 and decide to buy a commercial real estate property for $500,000. That leaves $375,000 that you finance with a commercial property loan at 3.25% interest.

Maximizing Your ROI with CRE Financing

Your CRE property, which happens to be a small store, needed some renovations, so you use part of the $375,000 from your commercial mortgage loan to bring it up to code. This was wise because it leads to more revenue. With everything clicking along, you cut out some extra expenses, and you now have great cash flow.

Because you have a $375,000 loan at 3.25% interest for 10 years and a 20-year amortization, your monthly payment is $3,664. The end result, assuming the CRE market stays healthy, is a cash-producing property that is an excellent source of passive income for you.


A Word About Amortization and Commercial Property Mortgage Interest Rates

You can save money and build your finances if you first shop and negotiate with commercial lenders for the best terms when refinancing your commercial loan. Lowering the commercial mortgage interest rate by just .5% and increasing the amortization can lower your monthly payment and increase the balloon payment. The lesson is that when you have a lower commercial property mortgage loan, you actually maximize your investment's return.


Some Suggestions for Balloon Payments and Cash Outs

Not everything is perfect: if you lengthen your amortization period to 25 years, you will still have a higher balloon payment regardless of the lower interest rate. You may be able to avoid this if your property is still generating revenue and operating on minimal expenses — meaning its market value grows, and when you pay off the loan, it should ideally be worth more than when you first acquired it.

Option 1: Sell the property and take any profits that result from the sale 
Though this can be short-sighted, since you're only looking at immediate benefits rather than what else you might do with the property down the road.

Option 2: Cash-out refinance 
Refinance the property and mortgage to free up the property's equity. This money can be used to acquire more CRE properties or renovate the existing one. The drawback is that cash-out refinance loans tend to have less favorable terms and higher interest rates compared to other CRE loans, but they're worth considering for their wealth-building potential.


A Few More Things to Remember When Refinancing Your Commercial Loan

Refinancing a CRE mortgage loan may include the costs of underwriting, staying compliant, and doing due diligence — beyond interest rate, amortization, and loan-to-value ratio, don't forget transaction costs, which vary by lender: underwriting, legal, title, origination, recording, surveys, environmental testing, and appraisal fees. If this is your first time refinancing, consider consulting a loan broker to help navigate the jargon and contracts.


What Should You Look for in a CRE Lender?

Not all commercial property lenders are created equally — some offer standard federal or state loan programs, others have programs designed for specific property types or client demographics, and rates vary. When refinancing, you'll have options including private money lenders, credit unions, and banks. Factors to keep in mind:

  • Loan size
  • Property location and type
  • Your borrowing history
  • Your net worth
  • Liquidity

Big CRE lenders may have more marketing budget, but it's the mortgage terms that count, small commercial property lenders can sometimes negotiate more flexible terms than larger institutions.


The Takeaway

Whether or not refinancing a commercial property loan is the right move depends on a variety of factors that should be carefully considered before you proceed. It has the potential to save money and allow you to renovate your CRE property, possibly increasing your ROI, and gives you the option of cashing out to purchase new CRE assets and grow your portfolio. The key to success is comparing your business goals with the terms you get from the CRE lender — shop around, compare rates and lender offerings, and consider engaging a CRE broker to save time, hassle, and money in the long run.