***Commercial Loans / ARM****HOW TO PREDICT THE FUTURE?***

[Seth Mosley]

Hey Guys!

This question comes from my search in finding the next stage of funding after I max out my 10 conventional 30-year Fannie Mae Mortgages for our rental properties. We've met with several commercial/portfolio lenders and I'm kind of finding the same things everywhere I look. The standard is that either it is an ARM (on a 5 year lock or sometimes 7) - or it has a big balloon payment due at the 5 or 7 year mark as well. I haven't found just a "standard" 20 or 30 year amortized fixed rate loan option, except for ones that are in excess of 9.5% interest rate, which shoots most deals apart in terms of monthly cashflow.

I am wondering for those of you out there dealing in commercial / portfolio financing, how do you evaluate a property for purchase with monthly metrics, when there is an ARM? (ie, how do you predict the future, to know what the rate increase "might be"?)

Or for those of you who do the balloon route, do you just count on refinancing before the balloon payment comes up due? And what if you can't? What then?

Thoughts or suggestions greatly appreciated!

+Seth Mosley

Mosley Properties

[Jeff Sims]

As a SFR investor and a commercial lender myself (since 1999), I think I can speak on the topic. A commercial loan is not a residential mortgage loan and can be alot more forgiving in the approval and documentation process. Also, there's usually just an origination fee (1.0% of the loan amount) and no underwriting, doc prep, credit report, rate lock, or whatever other fees they tack on residential mortgage loans. One last thought, there is no maximum number of commercial loans you can have (either in your name or an LLC) and a single commercial loan can include multiple properties.

That said, commercial loans do have limited terms and conditions vs a residential mortgage. The max term is generally 5 years (fixed or variable rate) with a 15 or 20 year amortization depending on the dollar amount and condition of the property. 5 year fixed rates (in NC) are in the 5-6% range right now and a variable rate is probably Prime+1-2% (4.25-5.25%). With the variable rate, a floor/mimimum rate is usually established that kicks in with our current rate environment. The floor rate is generally 0.5-1.0% over the current variable rate realizing that variable rates (Prime) will increase in the coming years. That said, I try to point out that variable rates will most likely go up over the next 5 years and the fixed rate may be the safer bet and allow you to sleep a little better at night.

Regarding the balloon 5 years out, as long as the loan has been paid as agreed and the bank is still in business, the bank will generally want to keep the loan on the books and offer competitive renewal terms. The process at maturity is the same at origination. Provide updated financials, get an updated appraisal, and sign a short renewal/modification agreement (there's usually a nominal renewal fee as well). Signed, sealed, and delivered with no attorney closing stuff and the loan is set for another 5 years. When I'm at the closing table (at loan origination) I generally say that in 5 years we'll get updated financials/appraisals, and update the rate and payment accordingly.

Hope this helps and I welcome any and all feedback.