***Commercial Loans / ARM****HOW TO PREDICT THE FUTURE?***

33 Replies

@Seth Mosley

@Ned Carey hit the nail on the head! 5-yr terms have worked extremely well during the past several years because rates have moved down. They may seem less risky to people who had good luck during that time period. But I think eventually they will go up and that might be an issue for some.

The smart investors I know run sensitivity analysis to see what their exit looks like with higher rates and higher caps. One way to mitigate the risk upfront. If the deal still works on a refi with rates 250 bps higher, then you might be safe. If it doesn't, you are rolling the dice unless you borrow at a low LTV.

Originally posted by Account Closed:

Seth Mosley

Ned Carey hit the nail on the head! 5-yr terms have worked extremely well during the past several years because rates have moved down. They may seem less risky to people who had good luck during that time period. But I think eventually they will go up and that might be an issue for some.

The smart investors I know run sensitivity analysis to see what their exit looks like with higher rates and higher caps. One way to mitigate the risk upfront. If the deal still works on a refi with rates 250 bps higher, then you might be safe. If it doesn't, you are rolling the dice unless you borrow at a low LTV.

 Sorry for the ignorance but please explain 250 bps - what is this metric and how is it figured in a real world situation?

Thanks

Originally posted by @Seth Mosley:
Originally posted by @Sean S.:

Seth Mosley

Ned Carey hit the nail on the head! 5-yr terms have worked extremely well during the past several years because rates have moved down. They may seem less risky to people who had good luck during that time period. But I think eventually they will go up and that might be an issue for some.

The smart investors I know run sensitivity analysis to see what their exit looks like with higher rates and higher caps. One way to mitigate the risk upfront. If the deal still works on a refi with rates 250 bps higher, then you might be safe. If it doesn't, you are rolling the dice unless you borrow at a low LTV.

 Sorry for the ignorance but please explain 250 bps - what is this metric and how is it figured in a real world situation?

Thanks

 Ok I answered my own question I think. 250 basis points equals a 2.5% interest rate increase correct? So is that what most investors use as a "safe" figure estimate these days?

@Seth Mosley  sorry for the delayed response.  You are correct.  100 basis points (bps) equals 1%.

1 bp = .01%

I didn't read all of this.

What you can get and the risk involved vary greatly based on the assets location and size.

Buyers want to have their cake and eat it too. They want the best loan on the riskiest asset so that they increase yield etc.

It just simply doesn't work that way.

Many commercial lenders have a minimum of 3 million in loan size on a loan. In my world that is a small property compared to a 20,50,100 million dollar asset.

Local banks work on spreads. They want to sell 5 year term. The reason is they cannot operate like non-bank lenders. If a bank is currently paying out 1% on savings and in 5 years is paying out 3.5% to bring in deposits then they cannot hang out a loan for 10 years at 4.50 fixed.

They would go from a large basis point spread in return to almost non-existent. They couldn't stay in business and pay employees and overhead. I have had this discussion on the phone many time with the vp or presidents of banks. They learned from the last savings and loan crisis of the 90's and do not want to repeat.

If you have a large quantity of money at a local bank they might push it to a seven year term because of the relationship but it will be a committee call. They will not do that for the average customer.

I do not like these loans personally from banks. It's a shorter amort. of 20 to 25% and a shorter loan term. Five years is generally not enough to pay down principal to offset refi rate risk. You might have rental increase and principal pay down but it's not that much.

I like leveraged debt at 75% with 25% down and at a minimum a 10 year fixed term with a 25 or 30 year amort. because rate is fixed in the 4's.

So buying at an 8 cap and getting a fixed rate for 10 years in the 4's make sense for yield and COC for commercial.

I would not buy a low cap and short term debt but some buyers do it everyday for a multitude of reasons.

Now some buyers prefer to put say 35% down and go with a 20 year loan where the rate is in the 5's. You lose cash on cash return TODAY but with rental increases make back the cash flow in later years and buy yourself some more security that the rate is locked. It is not  a simple answer or choice to make.

There are variables from recourse or non-recourse, ltv, cash on cash, principal pay down when debt comes due, defeasance or not, cash management issues, amortization length, etc.

I can list a lot more but it is a complex process where much thought needs to be given along with the exit strategies.

I like local banks for turn around projects that other lenders will not touch because it is a suburban or rural area and there is no pre-pay penalty. The equity growth from stabilizing is usually enough to offset when the loan comes due to refi or sell off and 1031 into one or more properties.   

    

Originally posted by @Michael McGovern :

I will email you her contact info.

 Please refer the lender

If you look at some of the current 5 yr ARM's, rates are fantastic (2.375% for an investment property). Some of these come with a 2/2/5 cap, so no matter what, your rate can only jump 2% per year after year five. and can never exceed 7.375% after seven years. If you look at raising rents 3%/yr, your rent would have increased 21% by that time. If you've got a GRM anywhere near 10 you should have a positive cash flow even with the worst case interest increases.

Originally posted by @Michael McGovern :

I have a lender that will do 30 year amort, with a 15 year ballon. It's fixed for the first 5 years and no prepays. I can refer you if you would like.

 I would love to get a referral if this person is still in your network !

Originally posted by @Michael McGovern :

I have a lender that will do 30 year amort, with a 15 year ballon. It's fixed for the first 5 years and no prepays. I can refer you if you would like.

 As others have mentioned, if this lender is still around and able to sell the same product as mentioned or similar I would most certainly be interested in speaking with them much more in depth. Thanks in advance if this information is still available!

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