How to Refinance Your Investment Property

David Cohn
Jul 24, 2021

The shaky economy is stressing the importance of liquidity. It is causing many companies to be concerned about their intermediate-term cash flow and their ability to fund future capital requirements. Moreover, a looming commercial property loan maturity can amplify such uncertainties.

Are you feeling this pressure? Refinancing your commercial real estate loan using the right approach can provide an excellent opportunity to access much-needed equity.

In addition, it may allow you to unlock capital that you’ve built up after many years of property appreciation and loan amortization.

But before you move forward, it’s essential to understand what commercial real estate refinancing means and how to improve your results.

Refinancing for commercial property loans

At its core, refinancing a commercial property means taking out a new mortgage to pay off the existing one. Done correctly, it will enable you to enjoy better loan terms and improve your cash flow.

Let’s talk about when it might make sense to refinance your commercial property, how to qualify for a refinance program, and how to maximize the amount you will get when you refinance.

The benefits of commercial real estate refinancing

There are many good reasons for investors to consider refinancing their commercial property:

1. Avoid balloon payments

While residential mortgages last 30 years, commercial loan terms are much shorter, usually lasting only two to 10 years. And while commercial loans amortize over 25 years, most of them become due within just a few years.

A balloon payment for the remainder of the loan is required at the end of the loan term—and this large amount of cash can put financial stress on a company, especially during uncertain times.

The good news is that there is an option to refinance commercial property before the balloon payment is due. This will allow property owners to avoid having to make this large payment.

2. Secure better loan terms and interest rates

Refinancing might make sense if you want to secure lower interest rates or better loan terms. Both will ultimately help you lower your monthly payments and therefore improve your cash flow.

You can also choose to refinance from an adjustable-rate loan to a fixed-rate loan. This may be a good idea if there is a risk of interest rates rising. In addition, switching to a fixed-rate loan can provide more stability and allow you to better plan your budget.

3. Take out cash for property improvements

Lastly, some commercial property owners refinance their loans to use the money for improvements. This can be done through a cash-out refinance. The logic behind this is that property renovations will enable them to charge a higher rent and increase their profits in the long run.

How to qualify for commercial real estate refinancing

The eligibility requirements for commercial real estate loan refinancing are very different from home mortgage refinancing. Lenders will want to look at the following:

1. The net operating income (NOI) of the property

The two most significant determining factors for getting approved in residential mortgages are the borrower’s credit score and income. This is not the case for commercial properties.

The building’s net operating income is the single most significant factor that lenders look at when reviewing an application for commercial refinancing. A solid NOI demonstrates that the property generates enough cash to sufficiently cover loan payments in the eyes of lenders.

NOI refers to how much income the property generates minus all operating expenses. The higher the NOI, the higher the chances of the application being approved and the loan terms better.

2. Business credit score

Lenders will contact any of these three agencies to determine your business credit score: Dun & Bradstreet, Experian, or FICO. Both Experian and Dun & Bradstreet use a range of 0 to 100, while FICO’s scoring system ranges from 0 to 300.You are likely to receive more favorable loan terms if your business credit score is high.

However, if you will be guaranteeing the loan personally, expect the lender to look at your personal credit history, too.

3. Debt service coverage ratio

More often referred to as the DSCR, this metric tells the lender if your business has enough money to take on more debt. To calculate the DSCR, divide your annual net operating income by your total annual debt payments.

How to refinance a commercial property loan successfully

Finding the right lender is the key to successfully refinancing a commercial property loan. Here are some tips on doing exactly that:

1. See if you qualify for the SBA 504 debt refinancing program

In this program, the small business administration agrees to guarantee a loan portion if the borrower defaults. Eligible borrowers can refinance up to 90% of the value of the property.

2. Compare several lenders

If the SBA 504 is not suitable in your case, then it’s time to shop around for lenders. First, make sure to compare their fee structures. Some lenders charge origination fees and other additional costs. You will want to create a list of these extra fees and make sure that you feel comfortable paying for them.

3. Take a close look at the closing costs.

Commercial property closing costs can be expensive. Be sure to ask the lender for an estimate before you even apply for refinancing. It also makes sense to do the math and figure out how long it takes to recover the costs of closing from the savings you will get from the new loan.

4. Advocate for your property.

Lenders tend to use conservative market assumptions in determining the value of a commercial property. Make sure to stay active and involved during the application process so that they don’t ignore pertinent information specific to your location or building.

For example, is there a lease in place? The lease rate can affect the loan value. It might make sense to restructure the lease before applying for refinancing.


With many factors making the future uncertain, it may be a good idea to give your business some security with extra liquidity from refinancing. Do it correctly, and it can lower your monthly payments, allow you to leverage your equity, and give you better loan terms.

Talk to a commercial real estate financing expert if you need guidance on this matter.