Commercial Loans with Balloon Payments

1 Reply

Hello,

I am looking to cash out refi properties owned in my LLC. So far, I have only been able to find commercial financing, which I am fine with, but I want to do my due diligence before taking on this level of risk. Here are the details of the offer:

6% fixed with 5 year balloon

15 year amortization

LTV 89% purchase price or 80% appraised value, whichever is lower

The loan would cover 3 single family homes that I own in the Tampa area. Let's assume that the properties are worth enough that I would be going the 89% LTV route. These are the details of the homes:

Purchase price $45k, rents $850/mo

Purchase price $49.5k, rents $1440/mo

Purchase price $34k, rents $1100/mo

Given the properties being financed, how do the terms look? Are there any questions I should be asking before agreeing to move forward with this loan? I have never had experience with a balloon loan, so I am concerned that there is something important I am missing in my risk assessment. Thanks in advance for any advice.

Hi @Rick C.

I purchase regularly in the Tampa area and it looks like you´ve got some great cashflow with those three units. 

The interest rate and terms look pretty standard for a commercial loan specialist. To avoid doing this all over again in 5 years time a longer loan term would be nice, so you might want to shop around to see if you can get 7, 10, 12 or 15 years.

The problem with portfolio loans is that many have those short terms. You can get 30 fixed with individual loans, but you might struggle to attract interest if the appraisals are coming in at $50-60k per property when a lot of banks and specialist lenders want $80k+ appraisals before lending.

In terms of other questions to ask, the big one that comes to mind are their origination fees. They can vary from 1% - 5%. Many lenders also cash in by charging "LLC review" fees, which I always find very irritating. Then you have appraisal fees, underwriting fees etc. It can all add up very quickly, especially with a sub $150k loan. Make sure you crunch all the numbers.

Finally, the holy grail is private financing. Have you considered networking in your area to see if there are any friends, family or professionals who might like a 6-7% return over 15 years secured against those properties? Check out @Brandon TurnerNo Money Book for more information. It´s a nice holiday read :-)

Best of luck!