Commercial properties - shorter terms don't give you concern?

4 Replies

I realize there are commercial loans amortized over 30yrs but they still hold shorter terms (~5-7yrs).  This raises the question, how do you position yourself at year seven to not risk a potentially higher interest rate or need to sell the property to pay the balloon payment when you do not have control over what the property will appraise for in seven years?  Doesn't this sound familiar to a dark recent past?

@Jason Turo we have been able to find them with a 25 year term, 10 year fixed, and then only 1% per year raise (IF the market has gone up) to a max of 6% over the original rate - meaning our original on the last one was at 5%, so the max would be 11%. 

Yes, there is a big concern in my eyes when you can only fix for 5 years. The rental calculator here on BP is a great tool to see how those different scenarios might play out. 

Dan Dietz

@Daniel Dietz Thanks for the feedback Dan.  10yr fixed with a 1% raise per year, max 6% additional isn't too terrible.  That at least buys you time with the gradual increase to react and plan.  I realize banks need to prepare themselves against interest rate risk and so do we.  We have conflicting interests with the lenders (they want us to pay more, and we do not).

One interesting way to hedge against too much rise is to 'refinance early'. What I mean is say in 7 years, rates have gone from 5% to say 8% and look like they are going to keep rising. Even though we would not NEED to refinance then, we could if we thought looking in that rate out to 'year 17' at which point we will nearly have them paid for (we are making extra payments to increase cash flow at retirement time). 

Dan Dietz

@Daniel Dietz If those terms are available, that would be a good strategy.  Nice tip.

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