understanding a loan

11 Replies

Hi I'm still in my beginner stage in real estate and I want to understand everything about real estate to be successful in real estate.  I get a little confused when it comes to loans like how much I would have to pay back to the lender. I don't know if I'm right or wrong about it but below please look at the info in the Financing assumptions  would I have to pay the lender back $766,440 from borrowing $320,000. Can someone please break it down for me thank you.

Financing Data

A high interest rate over a long period of time equals a staggering amount, doesn't it?  Hopefully you won't actually be paying 7%.  Weigh the cost of that vs a 15 or 20-yr at the lower corresponding rate.  On one loan alone, I refinanced to a 15 at the lower rate (it's always lower, sometimes by a lot) and the extra $167/mo will save me $193,000 over the term.  

Weigh all of your options @William Brown .  The lowest payment is often the rule the poor and broke go by! 

Your wording shows why you misunderstand. You believe you are "paying the lender back" (to use your words) the $766,440, when you are really only paying back the original loan amount of $320,000 PLUS you are paying $446,440 in interest over the full duration of the loan; you can reduce that interest total payment if you do any sort of pre-payment of principal. 

Unless you're using a portfolio loan due to some exception you may need in your financing, I'd say it's safe to assume you'd get about 5.5% on the very high end of the rate spectrum. You'd like be well under that, but the buffer is safe for your calculations. I second what @Steve Vaughan says about shorter terms. Consider this the bottom of the rate market for quite a while, so set yourself up so you don't have to refinance anytime in the near future and increase your equity at an accelerated rate with 15, 20 or even 25 yr loans. 

@Steve Vaughan This is a chart from one of the bigger pockets blog I was just reading it trying to understand real estate analysis. And when I get ready to buy I will weigh all my options thanks for the info

My pleasure. Good luck. The other posts on this thread also gave some good advice. 

@Steve Babiak Yea that's a good way of looking at it instead of thinking im paying the lender back.  And pre-payment of principle is what im going to do when I get my first property get it paid off as fast as possible. 

I think it bears stating that you should not view the financing you get at the beginning of the deal as your final loan.

Investors should look at three stages of financing to calculate the value of a deal. The first is the Rehab/Construction phase. This is typically at a higher interest rate but does not amortize during the build out, so you are paying Interest Only. The next phase is the lease up / stabilization phase. This phase may be I/O or it may be amortizing, but generally speaking this is a temporary (up to say 24-36 months at most, hopefully closer to 12 months plus or minus). This (we call it min-perm) type of financing can be a second closing (if changing lenders) but often is just a conversion of the original note from an advancing note to a term loan with no additional advances. The third phase is the "The-building-is-ready-to-sell-or-cash-flow" stage. This is the stage that Permanent Financing (think longest Amortization Schedules and lowest interest rates) comes into play.

Knowing your exist strategy, the stages of financing and the options available at each stage, greatly improves your ability to generate accurate cash flow projections. It also allows you to not "step-over-dollars-to-pick-up-pennies". By that I mean that if you are trying to make the numbers work on a deal using the wrong numbers (i.e. using Perm Financing terms/rate when in the construction phase or vise versa) then you can pass up good deals thinking the debt service will be more expensive than it is in the long run, or you will spend a lot of time trying getting turned down by lenders by expecting terms/rate that don't make sense given the stage of the project you are in.