Questions about Commercial Lending

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Questions about Commercial Lending

Account Closed
Investor · New York City, NY · Member since 2017 · 146 posts · 56 votes

I'm trying to get into multi-family investing but I have some questions about commercial lending since I've never had this type of loan before.


For instance, if I am interested in a 25-unit apartment complex and have acquired a commercial loan to obtain the property with a 5 year balloon, is it relatively common for investors to refinance the commercial loan if they aren't ready to make the balloon payment? In this hypothetical, let's say I renovate every unit with the intention of flipping the complex, but couldn't find a buyer before the loan was due - would it then be prudent to refinance? Would that even be an option that late in the game? 

What if I do find a buyer and sell the unit before the end of my loan agreement (which might include a pre-payment penalty)? Would I then be subject to penalization?

Alternatively, if the apartment complex is brand new and doesn't need renovation and there is no opportunity to add value to the property would a lender allow me to refinance? 

Please correct me if I'm wrong, but are investors who intend to hold onto properties (vs flipping them) just refinancing, refinancing, refinancing indefinitely? At what point would it make sense to have full equity in a large property, if ever... 

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  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    6y

    @Rob Bianco

    If you’re up to date on your payments the bank will likely renew your loan, you’ll just reset the interest rate.

    Usually there is a declining prepayment like 3,3,2,2,1 during the 5 year term. Smaller Commerical banks might just say it’s a 1-3% prepayment penalty if you refi unless it’s within 6 months of your ballon. Some only charge it to you on refi and not on a sale. You refi if you’ve created a lot of equity or if you can get a much better rate and it makes sense to prepay.

    Usually returns start to plateau after 5-7 years so you end up selling and trading up, you also get to reset deprecation when you trade.

    Generalizations are presented above, so make sure you understand your specific situation and terms.

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  • Patrick LiskaPro Member
    Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
    6y

    Refinancing would depend on what rate you would be able to refinance at and if it is even worth it ( closing costs or fees added to amount). I recently refinanced a multi family I had,5 years and the loan was about to switch to a now lending rate plus 1%, so it would have been close to 6%, it would have automatically switched. I called my lender and we "refinanced" the loan into a new loan at 4.5%. Yes you then pay a little more towards interest again and little less towards the principle, but it was not much of a difference, for me any way. 

    You would have to check with your bank and negotiate with them any pre payment terms and if there are any if you sell, every bank is going to have there own loan terms and some of them may be negotiable.

    If you keep the property and add true value, meaning the appraised value of the property raises based on the work done, then you are adding equity to the building. when you refinance, you would be able to pull the additional equity out up to their loan to value limit, most of the times 80% of the value.

    refinancing, refinancing, is a way to pull the equity out of the building to use the money for other things. This tactic also keeps the building in dept as a form of protection, if there is a law suit ( and they can not get to you personally) there is no money in the property for them to go after. they may get some sort of judgement on the building, but by pulling the money out all the time you are getting what you can before anything like that happens.

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  • Account Closed
    OP
    Investor · New York City, NY · Member since 2017 · 146 posts · 56 votes
    6y

    So I guess my next question is when is it not a good idea to attempt to refinance on a commercial loan and pay the balloon? Would it be if the bank isn't offering better terms or if the economy is doing poorly and the property value is less than it was years earlier?

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  • Tarik Turner
    Lender · Hackensack, NJ · Member since 2016 · 1k+ posts · 372 votes
    6y

    There are 30 year fixed term commercial loans available as well if your true intent is to keep long term.

    Those loans can carry a 5 to 7 year pre pay

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