I am in contact on a four unit property and have run into a possible financing hitch. Here is the scenario. Purchase price 75K. Rent roll is 2390 per month. The projected monthly expenses are @ 1000 per month, which includes, insur, tax, maint, utilities, maint and PM fee. The financing my lender was suppose to be giving me was a 30 yr 4.75%, with 25% down. After the appraisal was done, they came back and said that it appraised well, but the comps used were out of the freddie mac limits and that that loan offer was not going to be able to done. They came back and offered a portfolio loan of 5.25% amortized of 20 years, but callable in 10. They said these loans are hardly ever called, but rate would adjust to whatever the current rate is, making it more of a ARM.
The numbers certainly change the debt service by about a $100 or so a month reducing the cap rate, but my bigger concern is if I should just forget about this loan all together because of the callable part. If I go ahead with this loan, I can wait and see what happens 10 yrs down, pay down the loan over the 10 yrs to reduce the principle further, or try to refinance at some point to a conventional 30 (with added cost though).
I am a bit hesitant at this point to move forward. Any thoughts out there with this scenario.
Its been explained to me that any loan is technically callable at any time, but they can't just do it for kicks. It also definitely seems like an ARM.
Both rates seem okay, but I've also seen better. Granted, I do not know your area, or your situation.
Usually, a good letter, or good wording will alleviate any Freddie/Fannie guideline rules. I'm in a rural area, and their guidelines get broken on appraisals all the time, but the appraiser must explain what.
I would look at how much you would owe after the 10 years, and make sure the worst case scenario is still doable. I would also look for a different deal. It seems like the cash flow difference is mainly due to the shorter time period, and less to do with the rate. I like a shorter time period, but it has to fit your philosophy.
Why don't you just reinvest the excess cash flow and pay of the unit. Seems like a great deal.
@Barry Cohen not to go off on a tangent but are these investment #'s correct or am I reading this all wrong? This seems like the deal of a lifetime.
$75,000 purchase price with 25% down @ 5.25% for 20 years would mean a payment of $379/month.
- 50% rule would be $279 / door
- $2,930 would be a 4% rule (as compared to the 2% rule) on rent premium in regards to the purchase price
- Cash on cash return would be 80%+
Where and how did you find this deal? If this deal is the real deal I wouldn't care if the loan is callable in 10 years or not, you'll have it more than paid off at that point.
THanks for the feedback. It is a good deal, and the numbers are what they are. It is just a concern about the change in the loan terms, which aren't terrible, but I haven't had this experience yet, so wanted to throw it out and get some reassurance. If nothing else, I can sell the property in 10 years and likely come out ahead. Thanks