Using Leverage in Commercial Lending / Pluses & Minuses That Go With Debt

Listen to Audio Segment of Brad on Real Estate Revealed Here:

Brad Hettich on Real Estate Revealed, Sunday, January 30, 2022


Transcript of Real Estate Revealed Radio Show on AM560 from Sunday, January 30, 2022


Good morning.  I cannot wait for Spring at this point – this cold is brutal. 


This morning I wanted to discuss using leverage in Commercial Lending and some of the pluses and minuses that go with debt.   


Let me start of by saying, I have too put my bias aside when talking about this topic because obviously I am in favor of doing more commercial lending, after all that is how I make my living.  But truthfully, I am always trying to advise my clients and help them make the best decisions possible that will provide them with protection while also giving them access to the best products available.  


If you are looking to buy any sort of investment property, whether commercial or residential, you first have to know how much you can afford to put down.  That is going to be key.  Most lenders are going to require between 25% to 30% down depending on the asset type.  Then the next question you need to ask is how much do you want to put down? 


There can sometimes be some strong benefits to putting more cash down.  Those benefits include:


  • Paying less interest over time
  • Securing a better interest rate as pricing is usually somewhat risk based and by putting more money down you can often times secure a better interest rate
  • Having less risk should values change in the future. Many properties with less equity were severely impacted by changing property values during the Great Recession.  
  • Having a lower monthly payment providing more cash flow flexibility
  • Lower loan to value transactions are easier to get done


However, there are also disadvantages of putting more money down:


  • You have less liquidity to invest in other assets.
  • Sometimes that equity you put into the property can be hard to access
  • If there is a change in property value, you have more funds exposed to that change in value


This equity question does not only apply to purchases, but also applies to cash-out refinances.  Some clients want to maximize the amount of cash they get on a refinance, but that does give them a higher loan payment, likely a higher interest rate, and more risk.  


Recently we looked to do a cash-out refinance on a single-family investment property for a client.  We had a conventional bank option that was at an interest rate of 4.00 fixed for 5 years but the maximum loan to value the lender would go to was 65%.  However, we had a non-bank lender willing to offer a 30-year fixed rate in the mid 5% range, and they would cash out up to 75% of value.  For our client they had to decide whether more cash-out and a higher rate today, but a fixed rate long-term, made more sense than a lower rate today with less cash-out.  In their cash they decided to take the higher rate with more cash-out because they believe they could get a return higher than then mid 5% range by reinvesting that money into other assets.  


Everyones’ situation is unique and everyone has their own risk tolerances. It is important to get with a lending partner that can present you with multiple options and help you find the solution that best fits not only your needs but your risk tolerances.  We would be more than happy to discuss financing options with anyone on any asset type.   As always, we can be reached at 630-988-4852 or via our website at  Thank you and have a great day!



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