A commercial mortgage bites the dust!

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A commercial mortgage bites the dust!

Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

I never do this! A little nervous with the Just Stop thread going on - but had to share.

Freedom is more important to me than anything. It's why I do REI. My 3-word goal for 2017 (if you remember that thread) was 'satisfy commercial mortgages' and I aim to do it!

In case you don't know, commercial loans usually have 5 year calls.  Some will call automatically and make you get a whole new loan, and some will just make you submit docs to re-qualify.  

I would like to share a letter (a little embellished, but I'm proving a point) I just sent to one of my local commercial lenders today, a community bank.  Hasta la vista, baby! 

Dear Claudia,

Thank you for your recent letter, providing me the opportunity to re-qualify for our little loan of $114,000 that is secured by $700,000 of income-producing assets, the entire LLC, my wife and I's personal name and my management co that has rights to collect all rents in my portfolio.

I do hope you will find my past 3-years tax returns, personal financial statement and the entire completed 1003 mortgage application sufficient to extend my loan for 5 more years at whatever interest rate you choose. Will this require another $3500 appraisal as well? Oh please, please - bless me with your mercy and grace.  

Just kidding!  Please accept this letter as a formal request for the pay-off amount and full reconveyance of the deed of trust as of May 1, 2017.   Is 2pm in your office a good time? Would you prefer cash or fed funds wire?    Kind Regards,  Steve

ONE DOWN - 2 TO GO!

A private lender I have known and done business with since 2005 is giving us a 10-yr fixed rate mortgage at 5.5% (the current bank rate) to pay this off.  No appraisal, no points and none of the usual underwriting docs.  

Thank you for sharing an important milestone with me!  

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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y

Sounds like a great strategy ... what zip codes are you investing in again? :)

Actually, I wouldn't be so worried about the Just Stop thread nearly as much as the barrage you are about to get on debt good, equity bad ... you won't get that from me, though. Congrats!

Your hunting gun is now racked, stacked, and fully loaded ... ready for the next recession, coming soon to a market near you ... or if you decide your hunting days are over and you'd rather just sit on the front porch drinking a beer, polishing your hunting rifle, telling tall tales of hunting seasons past, and laughing at the newbies gearing up ... hey, you probably now have that option or will real soon. It feels good to have lots of options, doesn't it?

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  • Steve Vaughan
    OP
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Bhekizwe M.:

    Congrats @Steve Vaughan

     Thanks, Bhekizwe!

    I am amazed people are trying to get commercial loans on their residential properties in LLCs. Just saw another thread on it this morning - "Can I get a commercial loan for my LLC?"

    Who'd want one? These things are a pain.  I've had 3 since 2003 and can't wait for them all to go away.  None of my residentials bug me every year or reset or need to be extended every 5 at whatever new interest rate.  Cheers and thanks again!  

    0Reply
  • Steve Vaughan
    OP
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Steve Vaughan:
    Originally posted by @Eli Kallison:

    That's what I'd hope for! Who knows, she may even offer you a better rate. I love the satisfaction that comes from writing notes like yours.

     Me, too!  So much so that this is my first 'success story'.  Property and deals come and go, but the opportunity to really stick it to a bank is special! 

    This site and a lot of us are here to stand up for the little guy.  Had to share a little guy win and I very much appreciate your shared enthusiasm!

     Update:  The loan was paid off May 1 as planned.  I asked the banker - "Am I 86ed?  I have my eye on a quad.  Ok if I come back and give you the opportunity to lend to me again on the residential side?" She smiled and said 'Sure.  And no, you aren't banned from here.'   Phew!  She's cool and I'm glad.  A residential loan won't have all of their claws in every business I own.

    Pay off a house or wait for an opportunity?

    I now have about $120k sitting idle, earning .1% in a savings acct.  I have a 30% probability of needing $86k for a DP on a nice quad I've been working on for 16 months.  The seller is on the fence still.  I have a house with a $60k bal at 8%.  Yep - 8%!  13 years in on a 30yr.  I'm considering paying the house off.  Recapture will take 51 months - been paying $1371/mo on it.  Will take over 4 yrs to get my money 'back', but I won't be paying $400/mo in interest anymore.  @Jerry W. and @Jeff Rabinowitz - I value your opinions on this highly. Should I pay the house off and build my 'opportunity fund' up again in case one comes along? Things are really frothy here and I am selling my least favorite SFR now. Local 'opportunities' are slim. Is a risk-free and tax-free investment a good idea? I'm thinking so, but would love other insight. Appreciate any feedback!

    3Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    9y

    Steve,

    Congrats! That was a hilarious letter. Just don't forget that real estate is a relationship biz. Almost everything is negotiable when it comes to loans and terms. It can be a 5/1 ARM with a 10-year balloon with a 30-year amortization with portfolio lenders in my market. Chase commercial division has 5/1 ARMs with no balloon on a 30-year ammo. Just ask around and tell the lenders what you're looking for. They're in the lending biz. That's how they make their money. They just want their money back plus interest so you have to look at it from their point of view.

    Although @Jay Hinrichs is correct in what he said, there are some lenders who are willing to bend the rules based on your net worth and biz relationship. 

    My partner and I had sat down with an underwriter and worked on the terms of the LOI directly after we had a verbal agreement on a multi-family purchase. He modified the terms on the spot, printed it and had us sign it right there. I believe his approval limits is between $3-$5M before he had to take it to the banking committee for approval. Where can you borrow short-term bridge loans for 4% interest rate with 1 point and no pre-payment penalty? ;o)

    1Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    9y

    @Steve Vaughan and @Chris Mason,

    I learned something new today. I didn't realize red door = free and clear. We have 3 buildings with red doors, but we still owe over $3M on them. Hmm, maybe we should repaint the front door to a different color. LOL!

    1Reply
  • Steve Vaughan
    OP
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Account Closed:

    @Steve Vaughan and @Chris Mason,

    I learned something new today. I didn't realize red door = free and clear. We have 3 buildings with red doors, but we still owe over $3M on them. Hmm, maybe we should repaint the front door to a different color. LOL!

     LOL, Minh.  There are A LOT of nice houses with red doors from when that was all the rage.  I'm positive they aren't paid off, either.   I have a 10 unit with blue doors slated to be paid off in 2019.  I will be painting them red then!

    Sorry I forgot to mention you in my question about paying off an 8% $60k sfr mortgage.  Opportunities are limited here.  What do you think, Minh?  Would you be ok with an 8% (minus minimal tax benefits for the mortgage deduction ) risk-free & tax-free return on a solo investment? I'll still have adequate reserves. Thanks!

    0Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    9y

    Steve,

    I see the dilemma. You're afraid once you paid off the $60k SFH at 8% and the 4-plex deal came through, you'd be short in cash.

    Since you're selling your least favorite SFH, I would hold off on paying off the loan for a couple of months. Once your least favorite SFH is sold, then you can use the proceeds to pay-off the $60k loan. So keep making that $400/mo payment for a few more months. That's what I would do in case the 4-plex deal came through.

    2Reply
  • Steve Vaughan
    OP
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Account Closed:

    Steve,

    I see the dilemma. You're afraid once you paid off the $60k SFH at 8% and the 4-plex deal came through, you'd be short in cash.

    Since you're selling your least favorite SFH, I would hold off on paying off the loan for a couple of months. Once your least favorite SFH is sold, then you can use the proceeds to pay-off the $60k loan. So keep making that $400/mo payment for a few more months. That's what I would do in case the 4-plex deal came through.

     Minh, I like your suggestion a lot. Thank you!

    I will wait for that little single family sale to close here in a couple weeks. That will leave me enough to do both and still have some reserves. I appreciate you!

    1Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    9y

    @Steve Vaughan, first let me say congratulations.  While loans are necessary evils, it is nice to get rid of the danger of having one called.  Now if I get this correct you have a loan out at 8% with a $60K balance, money sitting in the bank at .1% and your eye on a duplex you might need cash for?  If it were me I would ask the banker if I could get a line of credit on the house I want to pay off for at least the amount of the outstanding balance, or maybe more.  Find out all the costs, initial set up fee, interest rate, cost of title insurance, etc.  Take that cost and compare it to the cost of the interest you will pay each year on your $60K loan.  I would run those, but I don't know where you are in the amortization schedule.  I have a line of credit on a house I own that is at 6%.  I have had it for several years.  The first year the fees were a bit high, but now are are not bad.  My bank does not require that I pay it off every year, but they prefer I do.  It is really handy for buying a property with cash then refinancing it later as time allows.  I also use it to fund my 20% down payment when buying.  These loans are much more susceptible to being called than most loans, which none of us like.  I usually have a plan to pay the line of credit off with, at least every 2 years.  If the dollar amounts involved make sense you might consider the line of credit.  After the initial cost of approving the credit amount and any appraisal and title insurance the cost is mostly the interest.  

    On another note I agree with @Jay Hinrichs on the feds making the rules the bank dances to.  I will bet 99% of the folks on here have to personally guaranty their commercial loans, and have to send in yearly tax forms and fill out the annual financial sheet to their bank.  I have used at least 6 banks I can recall and every one requires this on commercial properties.  You might ask your banker why they do it etc.  The same for what you need to get a line of credit.  The information is actually enlightening.

    Anyway congratulations again and you might consider the line of credit on the house you pay off as a money saving alternative and still keep your gunpowder available if you want to pull the trigger on another property.  Be sure to explain what you plan to use it for and ask if they would issue a new loan to you if you used the line of credit for the down payment.  My banker was fine with it.  My banker can no longer approve my loans by the way, they must go to a committee to approve them now, something about passing his authority limit.

    2Reply
  • Steve Vaughan
    OP
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    @Jerry W. - thank you, thank you for your insightful and thorough response!  So glad I asked you specifically.

    I hadn't thought of trying to get an equity line on the house after I pay it off. My goal is not to borrow from banks at all anymore, so that's part of the reason I hadn't considered it lol.   I've been moving more into the private money space, if at all.  Lots of good folks out there earning peanuts on their savings.

    If I can get a seller carry at 6% on another little house to accept a $5k discount for an early pay-off (essentially bringing the return up to 8%), I will satisfy that one as well when my other place sells and potentially leverage it.  Would be nice to 'keep gunpowder available' (love it!) just in case. Speaking to my western roots you are there!  

    If your banker can no longer approve your loans because it exceeds his authority, you must be doing something right :)  Thank you again, Jerry.  Great to hear from you!

    2Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    9y

    That's a great idea. Find out if you can get a line of credit for the property before paying it off. This provides liquidity although a line of credit can be cut during a financial crisis.

    @Jerry W. and @Steve Vaughan, based on my experience, all portfolio lenders I've dealt with required a personal guarantee while the big banks like Chase gave us the option of recourse (personal guarantee) or non-recourse (they take the property if we default). There's a 15 bp discount if we go with a recourse loan.

    Good discussion gentlemen.

    2Reply
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