Interest rate question

5 Replies

Hi,

I have been talking to a an owner of 2 commercial buildings, he is older and ready to move on from managing these properties. Both properties are currently full. He is willing to finance the property if I put down 12%, he will charge me a fixed 3.5% interest rate for 5 years with a balloon payment at the end of the 5 years. He will amortize it over 30 years. I am currently trying to obtain all the monthly costs to come up with a total monthly cost, I have more most of them. Rough calculations, I should net about $1400-$1800 a month right from the start if they remain full. 

Questions I have are:

- Should you expect to make a monthly profit when you first purchase a commercial property? Is that normal or usually expected to break even?

- What is your initial thought on the fixed 3.5% interest rate for 5 years?

- What is your thought on 12% down?

- What is your thought on the 30 year amortization, is that a good or bad thing? Obviously it keeps the payment low, I'm sure I could always pay more each month.

- I know you would need more information to give an educated opinion of the deal, but just looking at the rough terms what are your thoughts?

I've done a lot of residential investing, now trying to move into the commercial realm and it just would like some outside opinions and suggestions.

Thanks

3.5% and 12% down are both incredibly low numbers. Sounds too good to be true on those terms.

Typically with a comercial loan you can expect a 5 year balloon or at least a rate reset. You can also expect at least 20% down if not 25% down so those are pretty good terms. 3.5% is well below market for ivestor property so again better than average returns. 

It is normal to expect positive cash flow when you buy an investment property.

Financing is just one component of underwriting a deal. If the property needs tons of work or tenants are sporadic in payments you could actually be paying out money monthly and be saddled with debt.

The rate and payment given are great. 12% down is just enough to maybe cover foreclosure costs if you do not pay the note. If you really want to go for the cherry on top ask for no personal guarantee. Heck you could even  put an option on it to run it  a few months with a chance to buy at pre-stated terms. That way if it is a real dog you just walk away and not buy it.