As a commercial real estate investor, you probably hear a lot about private capital loans and bridge loans, but hard money lenders offer a diverse assortment of loans that banks and other institutional lenders normally will not fund. The cash-out loan is one such type of financing. Here’s a brief explanation of what they are, how they work, and why you should include them in your real estate investing arsenal.

What is a cash-out loan?

A cash-out loan allows you to borrow against the equity in one particular property and then spend that cash on something unrelated to that property, such as buying a new property, making improvements to another property you already own, or consolidating multiple small loans into one larger one.

Why would you want one?

This type of loan allows you to convert funds that are locked up in the equity of an investment into spendable cash, thereby “cashing out” a property’s equity. If you find that all of your funds are tied up, a cash-out loan can provide the necessary funds for short-term financing of investments, projects, and developments. For example, Montegra recently funded a loan to a borrower who owned a gas station/convenience store that was under a long term lease to Conoco.  The amount of the first mortgage bank loan was $500,000 but the appraisal ordered by Montegra concluded a value of $1,500,000.  The borrower had the opportunity to purchase another property at an advantageous price.  The borrower asked his bank for an increase in the amount of their first mortgage loan (now at a 33.3% LTV with $1,000,000 in equity) but the bank refused.  “We don’t do cash out loans”.  This was not much help for the borrower in obtaining the capital to buy his new property.  Montegra paid off the existing bank loan (Montegra only funds first mortgage secured loans) and provided an additional $475,000 in cash.  With these funds the borrower was able to close on the other property and realized the opportunity to make a significant gain.  Montegra closed this loan in less than 30 days from start to finish.

How do you get one?

Due to what banks perceive as the high-risk nature of these types of loans, banks typically will not approve them. However, the asset-based lending strategy employed by hard money lenders allows them much greater flexibility and more amenable to financing cash out loans. Typically, these loans are approved for up to 65% of the property’s appraised value, have one to three year terms, and interest rates ranging from 10 to 10.5 percent if they are secured by improved income producing property.  The payments are interest only and do not require amortization thus reducing the monthly cash outflow.  Cash-out loans generally work in one of two ways: by refinancing a property that already has a conventional mortgage so that the borrower receives whatever funds don’t go to pay off the original mortgage, or by funding a new loan for a property that has already been paid off so that the borrower is able to pocket all of the funds. Either way, the result is a first-position hard money loan against one property and cash that the borrower is free to spend on other projects or investment opportunities.

Cash-out loans are yet another example of the flexibility and willingness of hard money lenders (such as Montegra) to work together with their borrowers to find creative, outside-the-bank lending solutions to financing problems to which conventional lenders often just say no.  The fact that private money lenders can make immediate decisions and close quickly is the icing on the cake.