Which commercial mortgage should I pick?

Question

My first post and excited to be here!

I'm buying a half commercial have residential property in South New Jersey. The bank will only let me get a commercial loan, which means I can only do a 5, 7 or 10 year arm.  i'd like to go with the five year, but my question is which amortization should I take?  If I go for the 15 year amortization I'm pretty much going to be breaking even every month, and if I take the 20 year amortization I'll make a little bit of a profit but I'll be paying more towards interest Initially. My goal is to make a monthly profit, but also use this as an investment so that in five years I can take the equity and put it towards a new property.  Which commercial loan would you advise? By the way, the purchase price is 295K, and potential rental per month would be $2800.  Thanks for your help and I'm so happy to join this incredible community!

Haney

Haney Mallemat · Answer

thank you...great advice. Two questions

1. The longer the amortization the higher the interest rates...what is the highest rate you'd take to get a longer amoritazation?

2. Is a 5/7/10 year arm best?

Thanks again!

Haney

Tim Milazzo · Answer

I forgot to mention, the longer the loan term, the more a difference in amortization tips in your favor!

Tim Milazzo · Answer

@Haney Mallemat - longer amortization is almost always better. I had to guess on some of the numbers, but check this out:

Loan Quote Comparison

Acquisition Price:

$295,000

Current Cap Rate:

11.4%

NOI:

$33,600

Loan Quote:

15-year     Amortization

20-year     Amortization

25-year     Amortization

Proceeds

Loan Principal:

$221,250

Origination Fee:

$2,213

Net Loan Proceeds

$219,038

Down Payment

$75,963

Payments

Rate:

5.00%

Loan Term:

5 years

Amortization:

15 years

20 years

25 years

Monthly Payment

$1,750

$1,460

$1,293

Monthly Cash Flow

$1,050

$1,340

$1,507

Ending   Loan Balance     (Balloon)

$164,958

$184,644

$195,984

As you can see, you'd be netting $27,420 more cash flow over the life of a 5 year loan by choosing 25 year amortization instead of 15 year. Yes, choosing 15 year amortization will "save" you $31,026 in your ending balloon payment, but you won't realize that difference until you refi or sell the property, and with monthly cash flow you can reinvest for compound gains. It's the clear choice IF all other terms are equal.

Fasil Khan · Answer

@Haney,

I do not have much expirence with commercial leading however, @Russell agree that you should shop a few to see who can give you the best terms.

Haney Mallemat · Answer

Thank you for your reply. Would I be wrong to assume that I can be more aggressive with the equity build up if I had a shorter reset period? Thanks again for your fast reply

Haney

Russell Brazil · Answer

If you shop around a bit, you should be able to find someone doing a 25 year amortization.   Id also probably go with the longest reset period as we at some point should enter a rising interest rate environment.