I'm getting ready to make an offer on a property with two triplexes and two 3/2's which have rooms rented individually for a total of 12 doors. This will be my first purchase out of state and my first purchase that requires a commercial loan. The local bank is proposing a 5 year balloon loan at 4.5% that is amortized over either 15 or 20 years. I've never dealt with anything but residential fixed rate loans. It gave me a bit of pause that the loan will have to be renegotiated in 5 years at who knows what rate. Asking around so far most people have said this is common practice. Just looking to get some advice on the deal and wondering how much I should hold in reserves for when it's time to redo the loan in 5 years. Any advice is appreciated. Thanks.
@Ed Lopez - yes, that is currently a very common and standard loan rate and term that banks will offer to an LLC; you may be able to get less than 4.5% if you shop around, and occasionally a bank with do a 7 year fixed rate rather than a 5 year.
I am unclear why you need to hold extra in reserves for redoing the loan in 5 years - you should have plenty of opportunities to refinance the loan before the 5 year balloon hits; we do not hold any extra funds in reserve for the end of the loan term.
@Michael S. thanks for the reply. I didn’t know what all would be due during the refi or if there would be an outside chance they would just call the loan.
Yup, this is pretty common for commercial loans. If you are more comfortable, there are lenders out there that will do a commercial loan whose terms are 30yrs. I'm not sure what you pay for them, but at least you'll have your rate locked in. Good luck.
@Ed Lopez there are also 20 year loans with rates that adjust at 5 or 7 years. Not necessarily a ballon. However ballons are more common in commercial.
@Ed Lopez ..where is the property? What price point are we talking?
@Ed Lopez ...the 30 year fixed exists but not from any bank, at least none I know of. Only portfolio or alternative money and there are only a couple/few lenders who offer it. But your loan amount is going to be very small too, which means you might take the pricing as a sticker shock (from a rate/fees perspective). It's probably best to do it with that local bank, even if the terms aren't as long as you'd like. And that is typical, although local banks and CU's that I've been dealing with in smaller locales outside of CA, respectively, still seem to be able to offer 7-10 year fixed options, which even if it hasn't been offered to you, you might want to ask. If you did want to check on the 30 year, just PM me. Door is open.
Why do a short balloon mortgage and deal with banks? Commercial lenders won't report on credit, over 80% LTV instead of 75% LTV like the banks, and it'll be a 30-year fixed.
Originally posted by @Ed Lopez :
@Jared Rine The property is located in western Illinois. 270K. @David M. I haven't come across any 30 year fixed commercial loans but Ill keep my eye out. I'm trying to do everything with a local bank here just to keep it cleaner.
"just to keep it cleaner" Lol. Banks don't know that word. They'll request 3x more docs, pull credit in the beginning and at the end, then report on credit and alter your dti.