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Updated over 2 years ago on . Most recent reply
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How to select the fixed period for my commercial loan
I’m closing on a sixplex, in Des Moines, IA, here in about a week. I don’t love the loan I’m getting, but it’s getting me started, and that’s what’s important right now. There’s a
“Range of balloon note products that we offer for multi-family. They range from 3yrs fixed to 20yrs fixed and are all amortized over 25yrs with a minimum of 20% down. Closing costs typically are around $1,600 plus .25% of origination. Below is a range of rates for each fixed period.
3yrs – 2.75-3.00%
5yrs – 3.10-3.35%
7yrs – 3.40-3.65%
10yrs – 3.65-3.90%
15yrs – 3.95-4.20%
20yrs – 4.20-4.45%”
Per my lender. Now once we get in to the property we’re planning to do a substantial renovation in each unit. Once the rehab is complete and the tenants are stabilized we want to do a cash out refi to get our money out and into the next deal.
So would it be better to take a shorter fixed period at a better rate? Since we’re going to refi at the end of the rehab, we’re not sure if it makes sense to be paying a higher rate during the rehab? Any advice is greatly appreciated.
Also, if anyone has a great commercial lender that would like to help w a refi when the time comes! Thanks!
Most Popular Reply
@Joseph Lyons if you plan on refinancing soon after the rehab a shorter term loan is the way to go. You want the loan term to be inline with your exit strategy. Most commercial loans have prepayment penalties and sometimes they can be substantial depending on how they are calculated and the current market rates.
Without a prepayment penalty I'd take a loan option that is the next one down the list from your plan. So if you think the rehab will take 18 months and are considering a 3yr loan, take the 5 year option. Life happens and things take longer than expected, rates fluctuate, bank become more conservative, so it is good to be covered for a little longer.
With prepayment penalties you have to do the math and make sure you can live with the penalty in various scenarios.