Commercial real estate rate

[Henry Hsieh]

I am contemplating going to the commercial real estate side for investment but the rates & terms are completely different vs residential.  I found an opportunity where the seller would consider carrying the loan at 5% for 5 years.  Is this a good term versus what the bank offers?  5 years seems short in a payback period in compared to how much commercial real estate generates.  How do you guys usually deal with this?  Manage it well, increase lease, sell the property within that time frame and keep moving upwards and repeat?  Thanks.

[Henry Clark]

OP  Not sure if this discussion is clear.

A.  Normally you would have a 20 to 25 year amortization period.  Your Loan period.

Commercial, normally will have a 3 or 5 year balloon term.  Your P/I is based on the amortization period during the balloon term.  The balloon term, is when things get renegotiated or per terms of loan, a change in P/I is made.

5 years is not the Payback period.  

Is 5% for 5 years good?  Normally I would say yes, but I have turned pessimistic.  I think at the end of 5 years interest rates will be over 10% from today.  Decide if the savings of seller finance at 5% versus a commercial loan at say 7.5%, is worth it from a balloon term time frame.  Also depends how much the commercial loan can increase in rate at the balloon period.  Today, I would rather fix the higher interest rate, with a known maximum interest rate hike at the balloon period.

Most commercial loans will be coming up in the next year to 2 years.  They probably did their deals based on 4%, but will now have to refinance around 8%.

B.  Your side question.  Run the numbers.

C. "Ditch your job"- Run the numbers. Personally, I would not give up my day job. All depends on how active or passive your REI type is. If you're just starting out. Do a Scaling exercise. How will you grow, with your team, finances, downpayments, etc. Only when it is Sunday at say 6PM and you just sit down for a 30 minute rest. That is when you might consider giving up your day job.