Longer loan term with better cash flow or shorter loan term?

[Connor McGinnis]

I am looking to buy an apartment complex in the greater New Orleans area. I am from the Midwest where cap rates are high and you can have positive cash flow with 10-15 year loans. In New Orleans area, cap rates can be between 6-8%. To make these deals work, it seems like you have to take out a longer term loan like 25-30 years.

You have to pay such a significant more in interest over time with these long term loans. Is this what you have to deal with when investing in this type of market?

I am also 100% financing which makes this even worse. I have a family investor that I will borrow from for the down payment, then finance the rest from the bank.

Since I have to do 25 year minimum terms to make a deal work here, is that worth it and is that the norm for these types of markets? My realtor tells me this is normal but it seems very risky to do. It seems like investors strongly bet on appreciation here which I dislike.

Any insights here would be very helpful. I am currently negotiating on a 12 unit deal and am struggling to make the numbers make sense.

[Tim Delaney]

Personally I try to push out my terms on all my loans even when investments could cash flow on shorter term loans. I don’t focus on the total interest paid over time metric. Because of the time value of money I would rather have the cash flow today to reinvest in other projects.

You mention that that seems to rely on appreciation- I think it is the opposite, by pushing out the term I am focused on cash flow. Whether or not the asset appreciates in 25 years I still have a paid off building.

The risk is if the asset declines in value AND you have to sell it for some reason. If it declines temporarily but you have good cash flow then it doesn’t matter.

Thats my two cents, hope it helps.

[Justin Moy]

I'm not a fan of buying a short term liability (no cash flowing property) in hopes of long term gain through appreciation. 

I'm also not a fan of the 100% leverage on any deal. I don't go above 70% generally and prefer mid or low 60s. 

If you have to "make" the numbers work, then it's likely not a deal you want to do. 

Great deals are hard to find, that's what makes them worth the trouble. If you're having a hard time finding good deals, that's normal. 

[Braden Smith]

I agree with the others who have commented. If you are struggling to make the numbers work, then it is likely not a deal to pursue.

Our biggest challenge in the New Orleans area is the cost of insurance. It is so high that it has become very difficult to find any property where it will have cash flow.

Have you gotten insurance quotes?

[Benjamin Aaker]

20 to 25 year amortization is pretty standard for commercial loans, in my area at least. What you are dealing with is a negotiation issue, not a rate issue. You need to educate the seller that with the rates so high right now, a reasonable investor can't pay 2022 prices.