@Mo Muigai good question, not sure if this has been answered but this is what I do in CT for loans.
For 1-4 unit:
- I always start with a Fannie/freddie loan as its an owner occupant loan. That will be the least out of pocket cost and best debt. Right now 3.75% for a 30 year fixed. You can use a 3% or 5% down conventional with MI (mortgage insurance), or FHA loan 3.5% down with PMI, or USDA 100% loan (Rural single family purchase), or 203k Rehab loan(Like the FHA but you can finance in construction costs).
If it is a straight finance property here is how I underwrite:
- Assuming it is a 1-4 unit property, I try to stick with value add so I can force appreciation and create the equity. Otherwise you will have to put down 25% in most cases, and you will run out of money real fast.
- So I ask myself, do I have the debt to income ratio to qualify for Fannie Freddie debt, long term, fixed rate, 30 year, as an investor. 75% LTV, limit to 10 in your personal name. Gets harder as you go plus the paperwork is a "pain" IMO.
- If the first bucket can't work, then I look at local credit unions for portfolio loans, meaning they don't sell the note and can underwrite on their terms, but still want to see income in most cases. Im hearing 4.25% for interest, 30 year term, and 10 year adjustable.
- Then I look at the commercial side, now the property will have to debt service, and terms are 20-25 year term, 4.25-5% interest over a 5 year adjustable. No balloon which is nice, but you take on the interest rate risk as a borrower. Something you always want to shift back to the bank:)
- The next bucket I do IF I plan on keeping the property long term, want to move fast, need short seasoning, and don't have the debt to income to qualify. Rates are 6.3% now, can purchase the rate down to high 4% range, 90 day seasoning cash out refi, unlimited amount of loans, 2-3 week closing time and low doc.
So every deal is unique, your goal is to have relationships in each of these buckets, stay in contact, and underwrite each deal individually. You also have to understand your end goal, they you just put the best debt you can at the time and plan for the worst.
This is how I think on rate/terms:
- I never want a balloon mortgage. Banks will say they can refi you then, but Ive heard horror stories about banks calling notes due, even though they never missed a payment.
- I want fixed debt at all times, BUT this gets very hard once you step into commercial properties that are unique, or aren't playing in the 1M range loan balance.
- interest rate really isn't something I stress over, if I have long term debt and the property cash flows day 1. Again try to get fixed, if not get as long of an adjustable as you can. Rates are SO cheap historically speaking.
- Fees and points vary across the above, ranging in from cheapest to most expensive. I look at the opportunity cost and don't care too much about points, especially if Im pulling equity out, my tenants are now paying them:)
- Worry about getting more deals, putting good debt on them, purchasing for cash flow day one. And the rest is just management to have a good asset.