Fresno, CA · Member since 2018 · 29 posts · 17 votes
Hi,
I am attempting to secure financing for a five-plex via a commercial loan. This is my first real estate property, but it's older and the loan amount is small (less than $200k), so the banks and credit unions I shopped around at are asking for higher interest rates. Here are the best options I've been given:
25% down:
5/30 - 6.63%
7/25 - 6.97%
10/10 - 6.92%
15/15 - 7.05%
10/30 – 7.11%
35% down:
5/25 - 5.5%
Am I understanding correctly that at the end of the first number, a balloon payment is potentially due? How do people navigate this? Is it very likely I'll just be able to refinance at the end of this period? From a leverage standpoint, it would appear the best thing to do is the 25% down, 10/30, but I just worry about the potential balloon payment after 10 years if I am unable to refinance.
I can afford the 45% down, but would love to be able to use that capital toward another purchase.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
8y
My first commercial loan in 2003 was 20% down 5/20 at 7%. The 5 was a rate adjust and call, but they never did. I paid it off last year.
I've had 2 others with same terms, but lower rates. My last one prior to payoff last spring was a 5/15 at 5.75% and was about to go down to about 5.25%. When they asked for my taxes and PFS again, like they did every year, I said nah- give me a payoff quote. If I wanted to be babysat, I'd go back to a cubicle.
Point is, the loan is callable at the 5,7 or 10 yr mark usually, not a balloon. They have the right to make it one and will, depending on how your financials look as you report to them every year.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
8y
My first commercial loan in 2003 was 20% down 5/20 at 7%. The 5 was a rate adjust and call, but they never did. I paid it off last year.
I've had 2 others with same terms, but lower rates. My last one prior to payoff last spring was a 5/15 at 5.75% and was about to go down to about 5.25%. When they asked for my taxes and PFS again, like they did every year, I said nah- give me a payoff quote. If I wanted to be babysat, I'd go back to a cubicle.
Point is, the loan is callable at the 5,7 or 10 yr mark usually, not a balloon. They have the right to make it one and will, depending on how your financials look as you report to them every year.
Lender · Dallas, TX · Member since 2018 · 110 posts · 32 votes
8y
Bruce, the first number is the loan term. The second is the amortization schedule that will apply, so yes, there will be a balance due at maturity. This is a fairly typical structure for commercial deals. Being able to refinance is not a given, but assuming no huge market corrections, you should be able to. Make sure the loan is prepayable at any time without penalty. Bank loans are usually structured this way, but conduit loans can prohibit early payoffs. This gives you flexibility to sell or refinance when market conditions are favorable. You can also try to negotiate one or two extension options in the loan (you will typcially have to pay an extension fee and meet certain requirements to be able to exercise the option)
Fresno, CA · Member since 2018 · 29 posts · 17 votes
8y
Thank you both for your responses - they were both very helpful. I think I understand better now. It sounds like at the end of the term, the loan is callable, and based on the performance and what the market looks like, can be refinanced or will have to be sold or paid in full. Thank you both again for taking the time out of your day to help a newbie!
Rental Property Investor · Tampa, FL · Member since 2015 · 1k+ posts · 969 votes
8y
Hi Bruce.
First number is the term length and the second number is the amortization schedule. The longer the amortization schedule, the lower the monthly payment (at the same interest rate). Another question to ask is whether the interest rates are fixed or floating. If they are floating, the may go up each year which will impact your cash flow.
Your best bet is to secure a loan with a term length that is longer than your projected hold period. So, how long do you plan on holding onto the property? Because if you don't and the loan expires in the middle of your business plan, you have no choice but to either refinance or sell. Also, you always want to start thinking about how you will exit the loan at least 12 months before the end of the term. You don't want to wait until the last minute because that will limit your options.