Offered a loan; should I take it?

[Iraj Kasimi]

I've just been offered a loan for $150k which is great. Problem is the loan term is for 8 years at 13.99% interest, and I can't pay it back early for 24 months.

I know everyone talks about raising funds, etc.  Should I take this loan?  I've been running numbers like crazy on potential deals and can't get much or any cash flow at this rate because my payment will be about $2700 a month.  Any advice would be appreciated!

[Jon Holdman]

Many first position lenders are going to ask "is any of the down payment borrowed".  If it is, and you say yes, they may not make they loan.   If you say no, you're committing loan fraud.  So, you would need to be sure the primary lender will even allow you to do this.  If you're talking about this $150k and $150k of your own money, it might fly with a commercial loan.  A conventional residential loan won't work.

Then it becomes a math problem. A $1.2 million property with a 10% cap means the NOI is $120K a year. The $150K loan would have an annual payment of $31,258, if I understand the terms correctly (8 year fully amortized). That's a bit less than the $2700 you mentioned, so there's something off somewhere here. A $900K 5% 20 year loan would have annual payments of $71,275. That's a total of about $102K. That means you're left with about $18K a year in cash flow. On your investment of $150K that's a 12% cash on cash return. That's pretty good. That works because the low rate I'm assuming on the first makes up for the high rate on this "mezzanine" loan. In general the trick with investment properties is that you want the cost of your money to be less than the cap rate of the property, and that's not the case for this $150K loan.

That feels like something of a predatory loan to me.  The rate and prepayment penalty are both quite stiff.  Is the lender asking for any money up front?  That, combined with the brutal rate and prepayment penalty, make me suspicious.

Also be careful with seller specified cap rates. The one bet you will win every time is that YOUR actual NOI will not be any higher than what the seller is claiming. Its a very good bet your actual numbers will be less, possible a lot less, than the seller is claiming.