Commercial loan with balloon note

[Bryan Crow]

I have a few paid for rental homes that are held within a c corp. I would like to expand the portfolio with mortgages but am being told that I would need a commercial loan rather than conventional financing. The commercial loan has a balloon note at 5-7 years. Does that mean I would have to sell or refinance at that point? Do all commercial loans require balloon notes?

Thanks

[Stephen Chittenden]

@Bryan Crow Because they are held in a C-corp, you will likely need a commercial note, even for residential properties. We hold our properties in an LLC, and have the same issue. You will need to make the balloon payment when the note is due. You can either do this by refinancing, selling, or using cash from another source. You have some interest rate risk because at the end of the term, you will be exposed to whatever the market rates are if you don't have the cash available to payoff the loan(s). Shop around though, you will find different products. For example, we found a local credit union that provided a 5/5-ARM. So, our rate is locked for five years, resets, and then locks for five more. At the end of the 10 years, we'll have to refinance or pay off the notes.

If you don't want to do a balloon, you can look at some of the hedge fund companies offering financing like Dwell Finance and B2R Finance. They will typically want the homes in an LLC, not a C-Corp though. They will provide 30-year fixed rate financing, but generally at a somewhat higher interest rate and with higher fees. They might also have a lower LTV cap than some local lenders would.

Good luck.