I am invested in the single family space but looking to expand into 5+ unit properties. My questions are around the loan terms. Here’s an example of a property I’m looking at: $600K list price with 6 units.
With commercial loan terms being mostly around 5-10 years, I get worried about what happens at the end of that term especially with interest rates where they are. My understanding is that at the end of the 10-year term, you have a few options: refinance, sell or pay the property off.
I would prefer a 30-year fixed loan like what we see in residential - is it easy to get a product like this for a property like the one above and is the rate different? What do investors typically do for this type of property? Just get the shorter term and refinance?
I’ve always liked the idea of having the property paid for in full at the end of its term.
I am invested in the single family space but looking to expand into 5+ unit properties. My questions are around the loan terms. Here’s an example of a property I’m looking at: $600K list price with 6 units.
With commercial loan terms being mostly around 5-10 years, I get worried about what happens at the end of that term especially with interest rates where they are. My understanding is that at the end of the 10-year term, you have a few options: refinance, sell or pay the property off.
I would prefer a 30-year fixed loan like what we see in residential - is it easy to get a product like this for a property like the one above and is the rate different? What do investors typically do for this type of property? Just get the shorter term and refinance?
I’ve always liked the idea of having the property paid for in full at the end of its term.
It’s actually worse than that usually… many commercial loans only lock their rate for 5 years. So while the loan is for 10, at year 5 it resets to the current rate which is usually prime plus some percentage rate over. (Mine is 2.25% over prime.). At year 10 it is a balloon… so it’s either refinance, or pay it off otherwise. On top of that, the loan amortization is often 20-25 years, so your monthly payment is based on a shorter pay-off period. If there is a good thing there it is that more of your payment goes to principle but it is at the cost of a higher monthly payment. It’s the risk you take with commercial financing. Hopefully your cash-flow is good enough to absorb any crazy rates in the short term. You can always refinance it in the longer term if for any reason rates are high when that time comes.
Real Estate Agent · Atlanta, GA · Member since 2020 · 416 posts · 233 votes
3y
Hey Welsh - 600k commercial loan will likely have some pretty rough terms unless you can find a way to get a hud loan on the property OR have a really good existing relationship with a local bank. Local banks are requiring significant deposits (8-10%) in an operating account at their bank as well if they are going to originate and hold the loan on their sheet.
There are a few more banks in GA, but outside of the ATL metro have quoted me at Prime + 50-100bps with a 10 year term / 25 year am. The further out banks like the opportunity to lend within the ATL metro as it is the main economic center of GA. Keep in mind these are adjustable after some period of time like Randal had mentioned.
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
3y
@Welsh Tucker, you seem to have covered the "what do you do" piece. Your balloon is due and needs to be paid in one way or another.
My local lender has 5 yr term, 20 yr Am. Assuming loan is performing, they have a $500 fee and reset rate, but continue the loan. Assuming I don't want to pull proceeds out, there is no new appraisal, no DSCR test, it is pay fee, sign docs and I am set for 5 more years.
I have not shopped around in any meaningful way for a fully amortizing commercial loan. My assumption is they exist. I know of one through a friend of mine, but he noted it is also tied to his church and I don't know name of it or if they lend outside of that religious community.