Introduction/Commercial ***SWAP*** Loan

[Kai Van Leuven]

I wanted to introduce myself on BP. I have been a Landlord for 10+ years. I own, manage, and fuss with 16 doors. All maintenance is done by me... I am looking to get out of that. We have 4 single family and a 12 Unit apartment complex. All of our (me + wife) stuff is nice and we have above average rents. I set no goals and take each property as it comes. If I see something I like, I try to buy it. We are in the Seattle Area so real estate has made me look a lot smarter than I am! **** Question***** I am doing a refinance on my apartment complex. I have been working with a local bank and they have talked to me about doing a SWAP. I think it sounds like a nice product if you are planning on owning for a long time. We are going to do a 20year term with a 20 year amortization schedule. They are quoting at 5.75%. I think it all looks good. I just don’t know anyone who has done one... I just turned 30 last week and am looking to hold this property into retirement. Any thoughts?

[Tom Bertz]

With a swap agreement you are actually getting two products to fix the rate at 5.75% (a hedge to fix the interest rate).   In my experience, the first loan will be variable and fluctuate with prime (libor) plus margin.   Then you purchase the swap agreement.   The value of the swap will fluctuate with interest rates but in the opposite direction (thereby fixing your rate).    If you hold to maturity then they both expire and you effectively fixed your interest rate at 5.75.

If for some reason you are forced to sell you will have to settle the swap agreement.  If interest rates rise from the time you settled on the loan you could have value in the swap agreement (the bank would pay you).   If interest rates go down you could be in a position that you would have to pay bank to get out of swap agreement.