Commercial loan reset

[Craig McLaughlin]

What is the plan for when commercial loans reset every 5 years?

Backstory: I am still mostly green on real estate investing but I do own 3 rentals. 1 is paid off and I have 30 yr mortgages on the other 2. I know that in 30 years the loans will be paid off and I can choose to cash out refinance or not. On a commercial loan, for a multi-unit property, the most common loan was 20%down, 25 year amortization, and then a balloon/refinance in 5 years. I passed on a 6 unit that did cash flow some; mainly because I believe interest rates are heading up and would hate to have to refinance and be stuck at the prevailing rate in 5 years. Could be 10% or more. Also, 5 years does not allow for significant appreciation in my area. Possibly unable to get financing in 5 years? What is everybody else doing for these concerns? Or just worry about it in 5 years.

[Jamie Grubb]

@Craig McLaughlin The commercial loan you quoted seems to be a bank loan.  There are other commercial options out there, but I will respond to the spirit of your question.

80% leverage on a commercial loan is very aggressive. I believe that targetting a 70% LTV removes a lot of the risks associated with the investment. This lowers your monthly payments and allows for more of a cushion in a downturn. That being said, you should be executing your business plan, holding sufficient reserves, and monitoring market rates.

When monitoring rates, you have to balance the remaining tenor on your loan (options greater than 5 years exist but at higher rates) versus the rates being offered.  Prepayment penalties are another consideration.  

As @Jai Reddy mentioned, it is good to consider refinancing prior to making the acquisition.  Many commercial investors were burned in 2008-2010 when they could not refinance loans as they came due.  Taking a conservative approach and considering pitfalls mitigate a majority of the risks associated with commercial investing.