First Portfolio Acquisition

9 Replies

I’m under contract for my first rental...and it’s actually a portfolio of a few single family homes. I based my offer (426k) off a loan with 20% down payment with 3.75% interest rate over 30 years, but the bank came back and will likely give me a commercial loan of up to 75% the appraised value at an interest rate of 4.5-5% over 15 years. I’ve worked with the banker before on my personal home, and they are familiar with the portfolio of homes and expect they will appraised between 600-700k meaning I might be able to get a loan out covering the whole deal plus an extra 100k.

Cash flow will be negative but I can cover it. Appreciation at a conservative 1.5% will be greater than the extra cash I put in towards debt service payments. Does the financing seem reasonable / what does the community here think about having a zero money down commercial loan at higher interest rate / shorter amortization vs. multiple single family loans at lower interest rate / longer amortization? I feel like I’m effectively paying now for more equity later and not sure how to think about that. My end objective is cash flow but can see how this might potentially help me build equity so I can 1031 these properties into a higher cash flowing investment down the road. Thoughts?

What does the rent growth look like in the area? Will they be positive in a year or two, or will it be quite a while down the road? If it just takes a year or two of rent bumps, then it might make sense. When you say it will be cash flow negative, is that after vacancy and maintenance assumptions, or is the rent less than the PITI? If it's the latter, then I would be a little more hesitant.

Also, is there a prepayment penalty on the commercial loan? If not, you might be able to refi out in 6 months into conventional residential loans. Then you get the benefit of the 100% financing, but are able to get the rate and terms you want, but just with a short delay.

The terms seem fine for a a standard commercial loan with personal guarantee. You will likely be offered the lesser of 75% of the purchase price or 75% of the appraised value, so you’ll need to plan for 25 down. You should also double check that the actual term of the loan is 15 years and not just the amortization tenor. More likely, if underwritten as a commercial portfolio loan, you will have tenor of 5-7 years with the 15 year amortization and a balloon payment at maturity.

@Joseph Cacciapaglia thanks for your reply. It’s hard to say if rent growth will be positive since this is my first deal / I’ve never paid close attention to this in the past. I do know rentals are hard to come by and at a 98-99% occupancy rate so expect that will mean I can raise rates.

When I say cash flow negative I'm talking after all vacancy and credit loss, expenses, and debt services. NOI is still 25-26k (in the green) but debt service is around 40k per year. So while I'm paying 14k out of pocket per year, there is no money down for the deal and I would be building equity over the years as I pay down the debt service over 15 years.

@Kaiser J. I’ve pasted actual loan terms below. I confirmed with the bank it’s it the lesser of 75% / they assuming the properties appraise they’ll find the full purchase price of the deal.

I need to google tenor. Not sure I know what that is.

The following is a summary term sheet relative to your loan inquiry for $426,000.00. We sincerely appreciate the opportunity to provide this term sheet to you as it relates to purchasing commercial real estate. Please review and do not hesitate to call me with any questions you may have.

This term sheet is intended for discussion purposes only and is not a commitment to lend. Its issuance may or may not be in connection with an application for credit. Rather, this term sheet is intended as an outline and does not purport to summarize all of the terms, conditions, representations, warranties, and other provisions to be mutually agreed upon and contained in definitive loan documentation.

Borrower:

LLC - TBD

Loan Amount:

Up to 75% of the appraised value not to exceed $426,000.00

Loan Type:

Term loan

Use of Proceeds:

Business Purpose

Maturity:

A three-tear term note with an amortization up to 15 years. Repayment will be principal and interest monthly with all principal and remaining interest due at maturity.

Collateral:

First mortgages on non-owner occupied commercial properties (addresses TBD) and an assignment of all rents and leases on the subject properties.

Interest Rate:

Fixed rate of 4.69%

Covenant:

On a consolidated basis, the Borrower and Guarantor must maintain at least $100,000.00 in unencumbered liquid assets with XYZ Bank at all times.

Other Information Includes:

Fees and Out-of-Pocket Expenses:

• All expenses incurred for the loan shall be paid for by the Borrower so that the Bank shall not be liable for any expenses associated with this loan

• Documentation Fee of $500.00 is being Charged.

Annual Financial Requirements

• Borrower and Guarantor shall furnish to Lender (i) a copy of their federal tax returns prepared by a firm or independent certified public accountant acceptable to Lender and certified as complete and correct to include all schedules, K-1’s and W-2’s as applicable. Guarantor shall also furnish to Lender (ii) a XYZ Bank personal financial statement as of 6/30 each calendar year completed in its entirety, signed and dated and Borrower and Guarantor shall furnish to Lender (iii) verification of investable assets.

Conditions:

• No material adverse change.

• Representations, warranties and events of default, standard for facility of this type.

• Standard default language used in documenting XYZ Bank credit facilities.

• Standard cross collateral and cross default provisions.

• Appraisals to be completed prior to closing.

• Standard due diligence related to real estate secured commercial loans.

• Auto BillPayer from XYZ Bank Depository Account.

• Other conditions as may be negotiated.

Other Requirements:

• Receipt of any other additional information that the bank might reasonably request.

Confidentiality:

This proposal is confidential and neither its existence nor its substance may be disclosed to any third party, except legal or financial professionals engaged to assist in evaluating this proposal, or where disclosure is required by law.

Governing Law:

The proposed credit facility would be governed under the law of the State of Ohio. Other States’ laws may apply to certain loan documents.

@Kaiser J. What worries me is the maturity language.

A three-tear term note with an amortization up to 15 years. Repayment will be principal and interest monthly with all principal and remaining interest due at maturity.

Does this mean if the bank doesn’t want to give me a commercial loan after 3 years the note is due in full?

Also I don’t think there is a balloon payment at the end based on the fact repayment is principle and interest monthly.

Originally posted by @Cory Edds :

@Kaiser J. What worries me is the maturity language.

A three-tear term note with an amortization up to 15 years. Repayment will be principal and interest monthly with all principal and remaining interest due at maturity.

Does this mean if the bank doesn’t want to give me a commercial loan after 3 years the note is due in full?

Also I don’t think there is a balloon payment at the end based on the fact repayment is principle and interest monthly.

 I believe that's a typo and should read "three-year term note". I would check with your lender on that. If it is a 3 year note, then yes, there would be a balloon at that time.

@Joseph Cacciapaglia thanks...I reached out and confirmed it is a three year term note with balloon payment due at the end.

How normal is this / do other lenders offer commercial terms that are for 15-30 years?

Ultimately I’m trying to assess in the current market how competitive this offer is. Seems on the surface to be good just from the standpoint I’ll have no down payment / can deploy my capital elsewhere.

Originally posted by @Cory Edds :

@Joseph Cacciapaglia thanks...I reached out and confirmed it is a three year term note with balloon payment due at the end.

How normal is this / do other lenders offer commercial terms that are for 15-30 years?

Ultimately I’m trying to assess in the current market how competitive this offer is. Seems on the surface to be good just from the standpoint I’ll have no down payment / can deploy my capital elsewhere.

 In my experience 3, 5, or 7 year terms are the most common, but up to 20 years is not unheard of. You'll usually get better terms on the shorter loans though. This varies greatly by the type of lender you're dealing with. I've been out of the commercial finance business for quite a while though, so my info could be dated. If you have a good local commercial mortgage broker, they're usually well worth their fee, especially until you really have a handle on things.