All Forum Posts by: Tim Milazzo

Hi Chris - what do you mean by purchasing a "model"? Can you share more details about the property?

Tom already hit the nail on the head on the net worth and liquidity requirements. But just to take an opportunist view, you can make it work with an equity partner of sufficient financial strength, or you can go with a balance sheet lender here like a bank or credit union, whose underwriting requirements can be more or less strict on a case by case basis. Are you buying in Connecticut?

Congratulations! You received more than one commercial mortgage quote. Now it’s time to dig in and choose the right loan.

You’ll be tempted to look at the Interest Rate first. Don’t.

The first thing you should be looking at is the Amortization.

The power of amortization

In a residential mortgage scenario, the typical choice is simple: take a 15 year fixed loan vs a 30 year fixed loan. You can pay off the loan off more quickly, stretch it out. In either case, the amortization of the loan (the period of time it would take to pay off the principal balance) is matched to the loan term.

In commercial lending, that’s usually not the case. When the amortization period of the loan is longer than the payment term, there is a loan balance left at maturity — sometimes referred to as a balloon payment. If you have a 10 year term, but the amortization is 25 years, you’ll essentially have 15 years of loan principal due at the end.

Now, the reason why it’s powerful: the longer the amortization, the less principal you are required to pay every month, so you are preserving cash flow.

Let’s look at a couple of examples:

Let's say you're acquiring a property for $7.5M, and there is an existing NOI of $450k per year. You receive a quote from both a private bridge lender and from a bank. Of course, the bank's interest rate is lower. Assuming either lender can bridge you for three years on the property, but the bridge lender offers Interest Only payments (I/O), and the bank puts you on a 20-year amortization schedule, which is the better option here?

Well, in the bank scenario, you're paying down loan balance, so you can recognize a larger gain upon refinancing or selling the property in three years. However, your cash flow is GONE — you're actually putting a few dollars back into the property every month over the course of the loan (assuming NOI is steady). In the bridge loan scenario, even with an 8% rate, you've carved out $2,500 per month in free cash flow. If you need immediate cash flow and you can't afford to defer your gains until later, the private lender is the better option here.

Alright, let’s go a little bit deeper. Here’s a project to hold over a 10 year period, and both loan options are amortizing. But the “cheaper” loan (by interest rate) amortizes over 20 years, with the higher rate amortizing over 25 years.

As expected, paying down the loan more quickly leads to more proceeds when you sell the property after 10 years. However, the Levered Internal Rate of Return, a metric that takes both cash flow and exit into account, is higher when the amortization is stretched out. It’s often beneficial to put more money in your pocket every month, rather than waiting for a big pay-day later. You can re-invest proceeds into other properties or diversify into something else entirely.

Take it deal by deal

Will a longer amortization always be the right answer for every deal? No, of course not. But when looking at multiple loan options for your property investment, it’s a good idea to keep the amortization period top of mind. You may be surprised by how much it determines the optimal path for your deal.

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Hi Anthony,

Sounds exciting to be getting into bigger deals! Here's my 2 cents. Getting a bank loan in your scenario, at 25-30% down, is most likely going to be full recourse financing. With enough liquidity, you should be able to find a bank to get you to 70% LTV and at least 20 year amortization to do this, if the property itself supports such a loan.

Now there's another option, which is non-recourse, lower rate, and higher LTV (up to 80%), but that you don't personally qualify for due to Net Worth. That's an agency loan, backed by either Freddie Mac or Fannie Mae. They expect higher net worth and some more experience, but if you're able to find a co-sponsor that meets those requirements, that would be another option.

 - Tim

Hi Michelle - I'd say it's rare to see longer than a 10 year term from a local bank, but it's absolutely worth shopping to make sure you have the best combination of rate, term, amortization, and leverage available.

Hi Sean,

 For an 18-unit, the three common sources of capital that you'd want to look at will be local/regional banks, the Freddie Mac small-balance program (if loan size > $1M) and the Fannie Mae small-balance program (if loan size >$1M).

 Assuming you're under $1M and going the bank route, it's always best to get quotes from several different banks, and then compare them based on rate, term, amortization, and flexibility. Depending on where you are buying in NJ and the value of the property, you may be able to get bank based in New York interested in the deal, which will widen your pool of potential lenders.

 Care to share more about the property? What's the listing price? Is it stabilized?

 - Tim

Hi Jo,

 While possible, finding fixed rates for that long of a period is rare. I think I'll be one step more bullish than Upen and that it's not uncommon for us to see a 10-year fixed rate with competitive terms if the property is stabilized and you have a good track record. The shorter the fixed period, the lower your rate will typically be though.

 At half a million, your loan will still be best placed with the region's banks and credit unions. Is the property in Bayonne? If so, there are definitely plenty of banks East of the Hudson that would be interested as well.

 - Tim

There are definitely banks that would lend in this scenario. It will typically be local banks and credit unions that tackle owner-occupied financing for small commercial assets.

Hi Haresh,

 If the total loan value is going to be less than $1,000,000, local banks are typically the best source of financing. They'll be underwriting based on the historical income of the property.

 If the historical income isn't satisfactory and it's more of a value-add play, then connecting with private bridge lenders is a great option. You can often find a short-term, 1-2 year bridge loan that would have a higher rate, but may be Interest-Only so you don't have to worry about Amortization until refinancing to long-term capital.

What's the acquisition price and the Net Operating Income?

 - Tim

Your two exit options after a hard money/bridge loan would be the sell the property for a profit if you've raised the value, or to refinance which you're talking about. As long as your leverage was reasonable, and the property is generating good cash flows, you'll be able to find a lender to refi. Different lenders do have different requirements about your own credit, but "there's a price for everything". Cash flow is king for refi.