I'd like to get everyone's thoughts on this topic since I'm no where near an expert on it.
Must if not all commercial loans have an adjustment period, of between 5-10 years. I'm sure their are others but those are the only ones I have seen. I won't touch a balloon loan after seeing guys lose their shirts and portfolios with them in the last crash.
Having said that we are in a historically low interest rate environment, their is only one direction for rates to go! Is anyone else concerned about this over the next 5-15 years, having large adjustments that would adversely affect cash flow?
In my own little business I have one for $1m, and I'm in the process of getting another for $1.9m, both are for 5% which is awesome, but both will adjust in 5 years with no cap, and with an amortization period of 25 years their would be 4 adjustments over the life of the loan . My game plan because of this fear, is rapid principle pay down. So when the rate adjust comes in 5 years my principle balances are around half of the original loan amount. I figure if they adjust to say 10% interest at that point I'll still be OK.
I feel these loans are going to cause problems in the commercial real estate world at some point. Am I being irrational?
With rates as low as they are these days, and the fed indicating it's inevitable that the rates will go up progressively, it makes sense to do a 7 or 10 year fixed rate term.
Most real estate cycles follow a 7 to 10 year cycle anyway, so refinancing at those intervals tend to work out either with an equivalent increase in equity if the rates go up, or a reduction if rates if they've gone up throughout the cycle. Use a 5 yr if you have issues that you know you'll be able to correct with the property that will benefit you in the shorter term.
In either case, your normal amortization will allow enough principal reduction to add to equity that makes it the better scenario short of a full 20 or 30 yr fixed loan.
Focus on added value to the property, refining management and reducing vacancies in the interim and you can't really loose.
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