Demystifying Take Out Loans: A Crucial Real Estate Financing Tool

As a real estate investor and agent for over 20 years, take out loans have played an integral role in many of my investment projects and client deals However, I’ve found these unique loans are often misunderstood or overlooked by those new to real estate investing.

In this article, I’ll explain what take out loans are, how they work, and why properly utilizing them is key for successful real estate projects. Whether you’re an investor, builder, or agent helping clients – a solid grasp on take out financing can open up new opportunities.

What Are Take Out Loans?

A take out loan in real estate is a type of permanent, long-term mortgage financing used to pay off interim short-term financing that was initially used to fund a project Take out loans are a two-step financing process

Step 1) Obtain short-term financing, like a construction loan, to build or renovate a property.

Step 2) Once complete, the take out loan provides the funds to pay off the initial construction loan.

The take out loan provides better rates/terms over the long run by replacing short-term, high-interest debt. Common examples include:

• Replacing a construction loan with a permanent commercial mortgage after building an office, retail space, apartment complex, etc.

• Paying off a bridge loan with a conforming mortgage after finishing renovations on a fix-and-flip project.

• Swapping an adjustable-rate loan with a fixed-rate loan to gain stability.

Core Benefits of Take Out Loans

Utilizing take out financing strategies provides several advantages:

• Access to More Capital – Can tap short-term financing to fund 100% of construction costs versus limiting permanent financing to 80%.

• Better Interest Rates – Short-term loans often have rates from 8-15%. Take out loans offer lower permanent fixed rates.

• Flexible Qualifying – Construction loans base approval on the project details rather than borrower credit/income like permanent loans.

• Loan Fee Savings – Only the take out loan charges origination fees, saving 1-2% of costs.

• ** Maximized Leverage** – Build with short-term loans that require little money down, then lock in permanent loans with remaining equity.

Properly orchestrating short-term and permanent take out financing is a core real estate investing strategy.

Examples of Take Out Loans in Action

Take out loans facilitate many common real estate transactions. Here are a few examples:

New Construction Homes – Builders secure construction loans to fund 100% of build costs. Once sold, the buyer’s mortgage pays off the construction loan.

Renovation Projects – Investors use bridge loans for purchase + rehab costs. After repairs, a conventional mortgage refi takes out the bridge loan.

Commercial Developments – Developers obtain construction financing for apartments, retail, etc. that converts to a conventional commercial loan once operational.

Refinancing Adjustable Rates – Homeowners with adjustable rate mortgages use refinancing to swap into fixed rate take out loans when rates are low.

These examples show how short-term financing can transition into favorable permanent take out loans once risk is reduced.

Common Take Out Loan Types

While individual lender programs vary, here are some typical take out loan structures I’ve used for real estate deals:

• Conventional Mortgages – Prime option for financing stabilized residential properties long-term.

• SBA Loans – For commercial properties, SBA 7(a) and 504 loans offer competitive take out financing.

• Permanent Commercial Loans – Take out loans for apartments, retail, office buildings, warehouses, etc. Often 10+ year terms.

• USDA Loans – For rural residential properties, USDA offers affordable take out financing post-construction.

• Jumbo Mortgages – For high-balance luxury homes, jumbo loans act as take out financing.

• Portfolio Loans – Banks may provide portfolio loans to take out unconventional construction projects.

Shop multiple lenders to find the most competitive take out loan for each unique project.

Tips for Securing Take Out Financing

Based on past deals, here are my top tips for securing take out loans:

• Have a take out lender identified upfront before obtaining interim financing.

• Be conservative on construction costs and schedules to avoid overruns that could jeopardize permanent funding.

• Only work with reputable contractors who will complete quality work on time and on budget.

• Seek take out financing well in advance of when construction nears completion to allow adequate processing time.

• Be ready to personally guarantee the interim loan in case issues arise before the take out loan can finalize.

• Have clean personal credit and available liquid reserves as a fallback to inspire lender confidence.

• Don’t wait – interest rate increases over the construction period can jeopardize take out financing.

My Experience Using Take Out Loans

I’ve utilized take out loans on dozens of real estate projects over the years. Recently, I financed a 6-unit apartment renovation with a bridge loan, then took it out with an SBA 504 loan once repairs were done.

Here’s how it worked:

• Purchase Price: $540,000

• Renovation Costs: $200,000

• Bridge Loan: $750,000 at 12% interest

• Take Out Loan: SBA 504 at 6% over 25 years

The bridge loan provided the capital I needed for the purchase and rehabs. Once the property was stabilized, the low-rate SBA loan took out the bridge debt. The long-term financing will now let me hold the asset and cash flow going forward.

Key Takeaways on Take Out Loans

Structuring the right take out financing strategy is essential for many real estate projects. Seek expert advice to properly plan construction, bridge, and permanent take out loans. This helps ensure you start off leveraged on the construction side yet end up with favorable long term financing.