What is Paydown Readvance Zero Cash Flow Investment?

Written By
Carl E. Sera, CMT
Published On
March 29, 2023

What is a Paydown Readvance?

Paydown/readvance is a loan structure allowing borrowers to pay down their loan balance and re-borrow the same amount. The most common use is in 1031 exchanges where investors complete a 1031 exchange, then pull funds out through a loan, accompanied by a zero-cash flow (ZCF) investment designed to pay down that large amount over 30 years. This allows the exchanger to defer capital gains, get access to a large portion of their principal right now, and in return, benefit from leverage and tax benefits.

What are Zero Cash Flow Investments?

Zero-cash-flow investments are properties with debt service equal to the property’s net income, meaning no cash flow for owners until the loan matures. Rather than a financial payout, these assets provide passive losses, which savvy investors may use as an offset against other investment incomes in their portfolio. Moreover, the advanced loans on these properties usually have a paydown/readvance feature which allows purchasers to follow tax-deferred 1031 exchange regulations while withdrawing considerable amounts of their equity without incurring any taxes.

Fully amortized loans, typically 20 to 30 years, are commonly used for zero-cash flow investments. Upon the loan's maturity, owners gain full possession of the property without any debt attached. These properties usually involve a long-term lease agreement with one tenant only, allowing investors to reap financial rewards from their investment over time. The leases typically take the form of absolute-net or bondable, relieving the landlord from any responsibility for upkeep and maintenance. The tenants are generally backed by investment-grade ratings, minimizing default risk considerably.

By zero-cash-flow investing, investors can follow 1031 exchange regulations while maintaining equity control. This type of investment can be an excellent option for those who desire low levels of risk, steady cash flow, and tax advantages.

How Does a Paydown Readvance work?

Paydown/readvance is an advantageous revolving credit feature within the existing loan that grants borrowers the option to pay down their balance in full at any time throughout its term. Furthermore, they can have it refinanced back to its original amount before being paid off (the “readvance”). These options allow customers to use extra funds when needed and enjoy financial flexibility without applying for additional loans or similar services. The loan agreement will enable borrowers to use the paydown and readvance options. The terms and conditions remain unchanged throughout the entire process, so there's no need for extra paperwork. Of course, specific criteria should be met to exercise either choice; as long as these parameters are fulfilled, then it is obligatory on behalf of the lender to act accordingly.

Through a 1031 exchange, the paydown option enables buyers to actively purchase real estate that meets the equity conditions of this type of transaction. After buying these assets, buyers may exercise their readvance method to extract any available equity from them.

What are the Risks Associated with Paydown Readvances?

Paydown readvance is a type of loan structure that can be used to finance a large purchase or project. It involves taking out a loan, paying it down over time, and then taking out a new loan to cover the remaining balance. While this type of loan structure can benefit some, some risks are associated with it.

First, the borrower may end up paying more in interest over the life of the loan than if they had taken out a single loan to cover the entire cost. This is because the borrower will be paying interest on the original loan and the new loan.

Second, the borrower may only be able to pay off the loan in full if the project or purchase generates enough income to cover the payments. This could result in the borrower taking out additional loans to cover the remaining balance.

Finally, the borrower may only be able to secure a loan to cover the remaining balance if the project or purchase generates enough income to cover the payments. This could result in the borrower having to find alternative financing options.

Paydown readvance can be a beneficial loan structure for some, but it is essential to understand its risks before taking out a loan.

What are the Steps Involved in a Paydown Readvance?

A paydown readvance is a loan that allows you to borrow against the equity in your property. Here are the steps involved in this process:

  1. Determine the amount of equity you have in your property. This is the difference between the current market value of your property and the amount you owe on your mortgage.
  2. Contact a lender to discuss your options for a paydown readvance.
  3. Provide the lender with the necessary paperwork to determine your eligibility for the loan. This may include proof of income, credit score, and other financial documents.
  4. If approved for the loan, the lender will provide you with a loan agreement outlining the loan terms.
  5. Sign the loan agreement and give the lender the necessary funds to pay off your mortgage.
  6. The lender will then provide you with a new loan secured by the equity in your property.
  7. Make regular payments on the loan according to the loan agreement terms.

Following these steps will help you understand the process of a paydown readvance and ensure that you can borrow against the equity in your property.

How Does a Paydown Readvance Work with Zero Cash Flow Investments?

A paydown readvance is a loan structure that allows investors to pay down existing debt and then borrow against the same collateral to access additional funds. This type of loan is ideal for zero-cash-flow investments. It allows investors to access capital quickly, use the funds to pay down existing debt, and then use the freed-up capital to invest in growth opportunities. With a paydown readvance, investors can access their equity without incurring any taxes, allowing them to reap the financial rewards of their investment over time.

While this isn't the primary focus of Sera Capital by a long shot, it's essential to understand what this is and how this may work for some investors. We find that <1% of people opt for this solution. To learn more about paydown/readvances and what most investors opt for insteadschedule your free 30-minute call today.

Sera Capital is a wealth management consulting firm specializing in all aspects and all available tax-efficient exit options for business owners, real estate investors, and developers. Our team works with you and your advisors to examine all available solutions, including 1031 Exchanges, Delaware Statutory Trusts, 721 UPREITS, Opportunity Zone Funds, and Section 453 Installment Sales, including Deferred Sales Trusts and Structured Installment Sales. We have two mottos. The first is “We help landlords and business owners exit tax efficiently,” and our second is “When you want out, call us in.” 

If you want to explore your options, make a no-obligation appointment with us today. Discover the possibilities.

Carl E. Sera, CMT

Carl E. Sera, CMT

Managing Principal, Sera Capital
Carl Sera is a Chartered Market Technician and the Managing Principal at Sera Capital Management, LLC. He has over 14 years of experience in the financial services industry with a focus on investment management.

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