Awesome Bank Financing! Does anyone else do this??

Question

I hear a lot of people on BP talk about that the best they can get for financing is typically 80% LTV. A local bank I work with will loan out 85% LTV on 4 units or less and 80% on 5 units or more...here is the kicker though.

They will loan on the appraised amount even if higher than purchase amount. Example: 4plex I purchased late last year for 115k...it appraised for 130k...so they loaned me 85% of 130k which is 110.5k. So when factoring proration of taxes and getting rents prorated...I basically brought now money to the closing. These loans are "in house" loans which make a difference of course. Has anyone experienced this with other banks???

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Michael Seeker · Answer

@Bill Sargeson - It sounds like your commercial loan is a simple interest loan. If you hold the loan until it is completely paid off, it makes no difference whether you have a simple interest loan or an amortized loan (other than you get a slight benefit from paying early as you've noticed). If you pay the loan off before maturity, then simple interest is MUCH better than an amortized loan. So I wouldn't worry too much about it, but it's good to understand the difference. Here's an article that explains it pretty well:

http://www.mtgprofessor.com/a%20-%20amortization/how_does_simple_interest_work.htm

Bill Sargeson · Answer

Michael Seeker

Thanks for the article!  I read it which prompted me to pull out one of my loan docs and read the fine print on interest calculation and it matches the article's explanation of a simple interest loan.(I just assumed my loans were traditional).

Now I need to find the "sweet spot" of when to pay to maximize the principle payment.

Thank you so much for the article and info, now I understand what is going on.

Bill Sargeson · Answer

Michael Seeker

Sometimes the principle amount is less than the previous month.  I know in my own home the mortgage principle payment goes up every month, but with these commercial loans it seems to fluctuate up and down month to month depending on when I pay(even though they are always paid before the due date).  I don't know if I need to worry too much about it since the loan will be paid off in a set period of time.  I have never asked for an amortization schedule but maybe I will.

I am glad too see someone else uses the same method as I do for recouping my out of pocket money including repairs...it always seemed to make sense to me....make my out of pocket money back then everything else is gravy....and how long will it take to do it....very easy to compare different properties this way.

Mike H. · Answer

Hmmm. That is odd. I don't think your principal pay down should change based on when you make your payment. But maybe thats how it works.

The one nice thing about your model is that you're able to do it with very limited out of pocket which is great. In 10 years, those houses are going to be cash flowing like crazy because they'll all be paid off.

Its a different model and it seems like your actual cash flow is about 50 to 150 or so a month on these things which sounds kind of tight. But its still positive. And you're not dipping into your pocket to keep the business going so I think you've got a real good thing there.

I'd keep growing as fast as you can for as long as that bank will extend those kinds of terms. The 10 year is a bit tough on cash flow. But 10 years comes faster than you think.  And then your properties will start kicking in with some significant cash flow. If you were to buy 3 to 4 a year, in 10 years, you'd be looking at rolling raises of about 1,500 per month additional cash flow every year.

i.e. 30 houses x 100 a month actual cash flow - 3k per month
	After year 10, you'd have 3 houses that would get paid off and you'd be making an additional 1,500 a month without doing a thing. Then, the next year you'd be at an additional 1,500 a month.

In 20 years after they'd all be paid off, you'd be making about 18k a month. With little to no money out of pocket. What other investment could you possibly find that could do something like that for you.

And you have do have some other options to improve cash flow before 10 years.Wait 5 years on some of them and refi them again to lower your payment and boost your cash flow.

Either way, you've got some great options. But the key is that you've found some incredible financing there and should be able to make hay.......

Michael Seeker · Answer

Hey Bill, I analyze my rentals based on how long it takes to recoup my initial outlay as well.  This way it's easy for me to compare a rental that requires 5K of repairs with one that requires 25K (assuming repairs occur after I've financed the property).

To answer your other question, the ratio of principle to interest should increase each payment.  If your principle paydown is fluctuating by $25-$40 each month but not consistently increasing, then it sounds like you don't have an amortized loan.  Is this the case, or is the paydown amount just off by 25-40 from what you expect with the amortization schedule?

Bill Sargeson · Answer

@Mike H.

Yeah you are right.  I always thought my principle pay down was high, so it makes feel better that you confirmed that....My properties range in price from $18k-$45k, example of one of mine:

Purchase price $38k

Loan Amt: $36k  (this was back when they only required 10% down, but the SVP at the local bank let me slide with just $2k.  I have great relationship with him and have referred a ton of investors to him)!

P&I: $392.11

Property Mgmt Fee: $70, they take 8%

Taxes & Insurance: $134(they don't escrow I pay yearly, but this is monthly amt)

Rent: $875

Cash flow(not accounting for repairs or vacancy) is $278

The principle amount of the payment last month was $249.08

I agree with you I am all about cash flow, and would love to have a longer amortization.  But I also measure how much I can make each month vs the least amount of money out of pocket.  If I can get my out of pocket money back within 12 months I feel I am doing good.   Don't know if that is the right way to look at it or not, but it seems to be working for me.

One thing I don't understand(maybe someone can help me with this) is my principle pay down each month varies $25-$40.  The bank told me that it depends on how early I make the payment before the due date which I don't really understand.

Mike H. · Answer

Yep. Mine are 5 year balloon notes amortized over 20 or 25. Some banks will only do 20. Some will do 20 or 25 depending on how much I beg. :-)

I always go as long as I can though. I'm all about the cash flow.

Thats amazing that you can cash flow that much on a loan that is amortized over 10 years. Your principal paydown on those has to be incredible. Thats something that most people forget when they're looking at cash flow. Your cash flow may not compare as well as others. But when you add in your principal paydown, you're making out like a bandit on your deals.

Good example on a typical deal for me:

90k loan, 25 yr amort, at 5.5% = 550/mo payments and roughly 150/mo in principal paydown years 1 thru 3 (averaged across the 3 years)

On yours:
	90k loan, 10yr amort, at 5.5% = $975/mo and roughly $600 a month in principal paydown. You're paying $425 a month more in your payments and STILL cash flowing 225 and 375 a month on your properties? Holy cow. So that means, with your principal paydown, you're at about 900 a month in actual income on this deals?  Thats amazing.

Bill Sargeson · Answer

@Mike H.

Yes, mine are amortized over 10 years and yes they will roll rehab costs into the loan. The only requirement in doing the rehab cost is a full appraisal.

So you are getting loans with a 5 year term but amortized 20 or 25 years?  Man that would be tremendous.  I know of three local banks here that do these loans and they all do 10 year amortization, one will do 15.  These loans are also commercial loans(don't know if that makes a difference or not).  The rate is variable, prime plus 1.25% with a floor of 5.5%.  So all of mine are at 5.5%.

My cash flows to me seem pretty good, my worst is $225/month.  My best $375/month but then again I have nothing to compare them to.

Mike H. · Answer

@Bill Sargeson, 
	 @Tyler Smiarowski

So your local banks are lending you 85% of the appraised value AND allows you to roll in rehab costs as well?

And these are 5 yr balloon notes amortized over 20 or 25? Bill, it looked like yours are 5 yr balloons amortized over 10. That might be pretty tough on cash flow.

But holy cow. Thats some amazing financing there. Heck, even at 70% of the appraisal, that would be amazing if you're getting that money for the purchase.

I have one local bank that will do a 5yr/25 as a purchase and will roll in the rehab - which saves me quite a bit out of pocket but I'm stilling paying 30% of the purchase and rehab.

With your financing, I could be buying 10 houses a year no problem. :-)

Everything I do is all in at 70% or better.

You guys should county your lucky stars. And if I lived in that area, I would be calling you up right now to get an introduction to your bankers. :-)

The logic of it makes some sense though. I can do the same deal with hard money (i.e. roll the purchase and rehab into the loan) and then refi that amount rate and term with a local bank.  So it looks like they just figured they might as well cut out the middle man and let the investor get the loan amount up front. Saves you the hard money fees.

But what I'm shocked at is that they'll do 85%. Heck. I'd be dumbfounded if somebody said they would do 80% on investment property.

My only concern would be the 10 year amortization terms that you're looking at Bill. Thats an absolute killer to cash flow. I really like the 25 but sometimes have to settle for 20.  Still amazing stories.

The funniest part is that I really am fine with the 70% LTV my banks are doing today. I'm just glad that they're doing these loans at all. 3 or 4 years ago, I was literally having to beg the local banks to do these. They simply had no room left in their "ratios" to take any of these on.

Thats the one thing that does seem to have changed by me. Most of the local banks are at least much more receptive to these loans again. Getting them to take them is not the problem. Its getting them to come in at the better terms that I'd love to see improve (i.e. reasonable financing to me is a rate of 5.5% or better and amortization of 25 years - or at least one of the two :-) )

Still. Very encouraging. Love to see it. If anybody is in Illinois that has some inside info on local banks with the terms these guys are getting, please let us know.

Jon Klaus · Answer

Lending is continuing to loosen.  How loose will it get?  I don't expect 2006 standards, but wouldn't be shocked if that's where we go again.

Awesome Bank Financing! Does anyone else do this??

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