INVESTMENT PARAMETERS WHEN MAKING A PRIVATE MORTGAGE LOAN - PART 1
The investment parameters for private mortgage loans differ considerably from those of institutional mortgage loans, as we partially discussed in the previous section. The most important parameter to be considered when evaluating a private mortgage loan request is the loan to value. This is the ratio of the amount being loaned expressed as a percentage of the properties value. For example if an office building is worth $100,000 and we lend $60,000 total secured by the office building, then our loan to value ratio, or LTV is 60%. Private mortgage investors will typically lend up to 40% on raw land or undeveloped property; 60% on commercial income producing property such as office buildings, shopping centers, warehouses, etc. and 65% on residential income property such as a duplex or apartment complex. The key words here are up to; the maximum amount will be loaned if all additional criteria are met and if the lender feels good about the loan; lower amounts can be loaned if the either the loan or the borrower is considered less than ideal. This is a gut decision made with an in depth understanding of the criteria being used and the experience of looking at many lending proposals. Type of PropertiesThe second parameter is the type of properties to lend on. This is often determined by the comfort the lender has in disposing of this type of property in case of default. All other things being equal, single use property which would take a year to sell is obviously less desirable than a multi tenant office building which would not only sell quickly at 80% - 90% of market value, but which would be producing income with tenants paying rents while the property is up for sale. Different categories of real estate are residential, multifamily residential, office building, office warehouse, warehouse, shopping center, industrial and single use facility. All these categories can be divided further. Residential can include single family residences, duplexes, or four units. Multi-family residential can include small (5-20 unit) apartment buildings, medium (20-100unit) apartment buildings, and large (100 + unit) apartment complexes. Each of these categories can be further classified as A, B, C, or D property, based on age, condition, amenities, location, rental rates and area. Office warehouse can be classified by size and condition as well. Shopping centers are usually classified as strip centers, neighborhood centers, area center, town center or regional mall. A single use facility is a facility that can only be used for one type of business, such as a drive thru restaurant, and typically would have only one tenant.
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