Looking into a commercial loan. How is balloon payment handled?

Question

I can work with the higher interest rate and try to find deals that fit the added expense, but if you do a CL on a 20 year amor with a 10 year balloon, how do most people handle this?

1) do they simply save up the case to pay off the loan at 10 years?

2) do they refinance?

- if yes, what are some examples of typical CL refinance terms at 10 years?

3) what other scenarios could be utilized as i would think most people don't typically pay off the CL at 10 years as that would greatly reduce their leverage and ability to do more deals.

Chris Field · Answer

As for rates no one can predict the future but...don't bet against the fed. We are probably going up 1 point this year and one point next.

So for example that means my 5% note will adjust to 7% in 3 years.

Chris Field · Answer

In 2008-09 when the credit markets froze a lot of investors with balloons due; used the send in the check like always and pray approach.

It worked sometimes because the banks didn't want the collateral back.

Balloons are but one commercial loan product offered, you can also get fixed typically either 10 or 15 year, along with regular adjustable mortgages.

Steve S. · Answer

Excellent!  I'd appreciate your insights.  My issue is one of scaling.  I can't keep writing $35,000 checks give or take forever to put 25% down on a property for a conventional loan so I'm trying to better understand how to maybe use CL's to alleviate this issue.

I have much to learn on this but do have a fair amount of experience building my portfolio with conventional loans and am hoping commercial loans will help me continue to scale.

Here are a couple of questions:

1) when the balloon comes due (seems to be typically in 5 years), how often does someone have to actual pay the balloon payment and is unable to refinance?

2) when one does have to pay the balloon payment because the bank won't refinance, what are some of the reasons the bank won't refinance?

3) If one is able to refinance at the time of the balloon payment, what are the terms typically?  Obviously no one can predict rates in 5 years so assume that will be what it is, but is it still typically another 5 years until the next balloon payment or refinance and a 20 year amortization?  If so, wouldn't this mean the monthly payment beginning with the first payment in year 6, if you could refinance instead of making a balloon payment, would be less than the monthly payment the month before?

Wade Sikkink · Answer

Refinance is the typical thing most people do.  We bought a 14 unit building in 2013 with a 20 yr am loan and a 5 year balloon.  We just refi'd it in Nov.  I refi'd a little early before the balloon was actually coming due to lock in a lower interest rate.  I believe rates will be going up over the next few years, so I wanted to refi now and get a low rate locked in.  On the new loan we have a 15 year am and a 7 year balloon, so I'm locked in on the low rate for the next 7 years.

The terms you can get on the refi when the balloon comes due will depend on the overall market conditions and terms that are generally available for commercial loans.

Good luck.

John Broussard · Answer

In this case you would either refinance or sale the property. Most CL offer 20 to 30 yr terms fixed terms or Arms. If you have additional question regarding Commercial Loans. I would be glad to answer them.

Andy D. · Answer

I'm actually wondering about this myself as I'm also looking into 5+ units which would entail a CL. Typically I'd say one would just refinance after those say 10 years. However, with the likelihood of interest rates by then having gone up significantly, there is an obvious risk of the property then possibly no longer cash-flowing properly. Especially when factoring in the added 10 years of age for the building and everything associated with it. In other words: CapEx becomes more of a reality at that point. And with the 20 year amortization one wouldn't have significantly reduced the principal.

Saving up cash during those 10 years to pay off of the remaining balance might on the one hand be simply not possible (at least not with the money coming from that property itself/alone) and on the other hand also not really something I can envision I'd do over such a long period of time as I'd be sitting on a lot of cash that wouldn't do anything for me during that period while saving up. I'd rather use that money after maybe 2-3 years to buy something else that provides even more income.

One could of course just sell the place but that might not be of interest if it cash flows nicely and otherwise doesn't have any real issues.

Others might bank on sufficient appreciation but that would, I guess, again mean a loan to make use of this appreciation: back to the higher interest rate aspect.

So yeah, how do people go about this?