By Ron Osborne, Managing Director
Sperry Commercial Global Affilates | RJ Realty
The decision of whether or not to sell a commercial property before a low-interest rate loan matures and needs to be refinanced at a higher interest rate is a complex financial decision that depends on various factors.
Here are some considerations to keep in mind:
- Current Market Conditions: Assess the current real estate market conditions in your area. If property values are high, it might be a good time to sell and take advantage of the equity you’ve built.
- Equity and Profitability: Consider how much equity you have in the property and whether selling would result in a profit or capital gain. If you can make a significant profit, it might be a good time to sell.
- Loan Terms: Review the terms of your existing loan, especially any prepayment penalties or fees associated with paying off the loan early. Factor these costs into your decision.
- Future Interest Rates: While you expect to refinance at a higher interest rate in the future, it’s essential to consider the potential interest rate increase and its impact on your cash flow. Consult with a financial advisor or mortgage expert to understand the implications.
- Cash Flow and Expenses: Evaluate your current cash flow and property expenses (Property Insurance is at an all time High and increasing). A higher interest rate will increase your mortgage payments, potentially affecting your property’s profitability.
- Tax Implications: Consult with a tax advisor to understand the tax implications of selling the property, especially regarding capital gains taxes.
- Alternative Investments: Explore other investment opportunities that might provide a better return on your investment compared to the potential future interest rate increase on your property loan. Consider a 1031 exchange with a high-quality single tenant that can afford the expenses.
- Risk Tolerance: Assess your risk tolerance and financial stability. If you are risk-averse or concerned about potential cash flow issues with a higher interest rate, selling might be a safer option.
- Market Predictions: Consider economic and market forecasts. If there is a strong consensus that interest rates will continue to rise significantly in the near future, it may influence your decision.
Ultimately, the decision to sell a commercial property or refinance before a low-interest rate loan matures depends on your specific financial situation (can you add equity that will be required to lower the loan amount to the lenders requirements), investment goals, and market conditions. It’s advisable to consult with financial advisors, real estate professionals, and mortgage experts to make an informed decision based on your unique circumstances.