Contract signed, but three financing options to choose from
Hello BP.
After looking for MFH for a few months, I finally took the plunge and signed a contract. 6 unit apartment building owned by a husband and wife who are looking to get out of the landlord game and retire. Here are the property details:
6 unit apartment building (all units 2/1) in North Florida. Built in 1986.
300k purchase price. Gross rents are $3845 per month or about $640 per unit per month. Market rent is about $750-$800 per unit per month. Low monthly expenses. Condition is about B-, and most units need a little cosmetic work. (handyman type stuff for a 30 year old building). Long term tenants and microscopic vacancy rate over the last 5 years. In short, it is a 10.5 CAP, with 14.0 cash on cash return. If I did nothing to the place and only raised rents $60 per month, it is a 12 CAP and 18.0 cash on cash.
So now on to financing. Was only looking to finance about 225k (or up to 275k for rehab costs). Big banks really didn't want the loan since it wasn't big enough. Medium sized banks weren't really interested for differing reasons. Hard money lenders and private money wanted too much in ridiculous fees and costs. I finally got a small local bank to lend on the property. They wanted 30% down which was fine. For the remaining 209k, they have given three options, based on 4.0 Prime Rate today:
1. 7% (prime plus 3), for 60 months, 20 yr amortization. 5 yr balloon. P&I monthly payments.
2. 6.5% (prime plus 2.5) for 36 months then adjusted, 20 year amortization. 5 yr balloon. P&I monthly payments.
3. 6.0% (prime plus 2) floating and adjusting every 30 days 20 year amortization. P&I monthly payments.
Pre-payment penalty of 3% of loan balance in year one, followed by 1% reduction each year thereafter, but I dont see me refinancing or selling within 3 years unless it makes sense.
My realtor is also a commercial investor and says the rate options are pretty standard for the area banks. I like the bank, I like the lender I'm dealing with and the possibility for future deals is very good. I'm done shopping for other lenders since we have a closing date approaching. On future deals, the terms would likely improve. On such a small loan amount, I'm not worried about the rates too much. The property cash flows nice under all three options.
It pretty much comes down to risk/reward on the prime rate fluctuating. Higher rate is more stable in the future, lower rate is more volatile.
Any thoughts would be appreciated