Should buy a retail strip center with cash or get a loan.

palm trees, shops, stores-226987.jpg

Commercial Loan or Cash?
Posted by: Guest_Bob Aug 31 2004, 04:03 AM
Great site!

I am trying to figure out how if I should buy a retail strip center with cash or get a loan. Getting a loan is not a problem, but I am curious if my returns will on the capital will be greater or less than the 6.5% loan + 1.5 points (25 year amrt). I know that this turns into a tax question quickly — so you must have to compare the depreciation write off to the capital gains you would have to pay on the gains on the alternative?

Any input would be great! Thanks
Posted by: loanuniverse Aug 31 2004, 07:56 AM

I am a believer in using leverage as long as you do not overextend yourself and it makes sense.

In this case to me the answer will become self evident when I answer the following question:

”Can I get a return higher than what my cost of funds would be somewhere else with my money?” When you do the calculation for your cost of funds, make sure that you account for the closing costs and that you spread them over a more reasonable holding period {chances are that you will not hold the property for the twenty five years of the loan amortization}.

Lets say that assuming an X holding period you get a cost of funds of 7.125%, can you beat that somewhere else? Would you do better by trying to get two properties instead of one?

Other aspects to take into account are liquidity and the comfort obtained from not putting all of your eggs in one basket. While chances are that if you borrow against the property you will be on the hook through a personal guarantee, having a more diversified portfolio would allow for other revenue streams to make up a shortfall in the property.

Good luck

Author: Commercial Loan Underwriter