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Decisions You’ll Have to Make When Buying Your First Investment Property

by Tom Stachler,ABR,CDPE - Group One Realty Team

Tom has been an income property manager and marketing specialist for nearly 30 years.  We have spread sheets and other helpful tools for our client buyers or sellers.  Contact us today for more information if you are looking to invest. 

3 Decisions You’ll Have to Make When Buying Your First Investment Property

Whether you’re angling for financial independence or looking to supplement your family’s income, buying a rental property is a smart investment. Not only do real estate investments create passive income, but they also generate long-term appreciation. But before you start shopping for your first investment property, there are a few key questions you need to answer.

Will you buy a short-term or long-term rental?

An increasing number of real estate investors are opting for vacation Rentals rather than traditional long-term rental properties. Should you?

 

It’s true that vacation rentals have higher profit margins than traditional rentals. However, they’re also more work to manage due to frequent tenant turnover.

 

Vacation rentals aren’t suitable everywhere, either. Unless your area attracts enough tourism to keep vacancy rates down, a long-term rental is likely a safer bet. Many places also have restrictive rules on short-term rentals, with some cities banning rentals under 30 days entirely.

 

If you are buying in an area with year-round tourism and laws friendly to vacation rentals, buying a vacation rental could deliver a much greater return on investment than a traditional rental. However, you’ll need to factor taxes, property management fees, and other expenses into the ROI calculations.

How will you manage the property?

Speaking of property management fees: While some investors opt to self-manage their property, most serious investors prefer outsourcing to property management agencies. That’s because managing rental properties can be a full-time job in and of itself, but if you’re a first-time investor, you likely have other responsibilities competing for your time.

 

Trying to juggle it all yourself is a recipe for lackluster marketing, lapsed maintenance, and disgruntled tenants. While you might not feel the effects immediately, over time this has a big impact on your property’s profitability. A professional property manager is better equipped to keep your property in good condition and your guests or tenants happy. Unless you like the idea of fielding late-night emergency calls, look for an agency that offers a 24/7 support line to both you and your tenants or guests.

 

Be prepared to part with some of your rental revenue in exchange for top-tier property management. However, a good property manager saves money in other ways. Not only do they successfully market your property and ensure regular use, professional property managers also give you reduced rates for maintenance and repairs, either through in-house staff or volume discounts with outside contractors. Plus, with all the time you’ll save, you can find your next rental property and grow your income even further.

How will you pay for it?

For most first-time investors, the most confusing question isn’t how to manage the property; it’s how to pay for it. Lending requirements are stricter for investment properties than owner-occupied ones, with most lenders requiring higher credit scores and debt-to-income ratios for investment purchases.

 

The good news is you can use projected rental income to qualify for an investment property mortgage. However, you’ll need to complete a rental appraisal, known as a Comparable Rent Schedule, and only 75% of the projected income will be factored into your DTI ratio.

 

Investment properties also require larger down payments — usually at least 20%. It’s possible to borrow money for the down payment, although any new debts will be factored into the DTI ratio. Borrowing against a primary residence’s equity, either through a Home equity loan or home equity line of credit, is a popular way to fund the down payment. 401(k) loans and Roth IRA withdrawals may also be used for a down payment, but investors should discuss these options with their financial planner or accountant before making a decision.

 

With low risk and high-profit potential, rental properties are an easy entrance into real estate investing. However, buying an investment property isn’t the same as buying a home of your own. Instead of shopping according to what you like, you need to buy based on what sells. If you want guidance in choosing the right rental property for your portfolio, reach out to a real estate team that knows the local area by heart.

Tom Stachler is a licensed Broker and Builder, a member of the Ann Arbor Area Board of Realtors and CPIX Commercial Board of Brokers and has been assisting families buy and sell real estate in the Ann Arbor, Saline, Dexter and surrounding communities for over 30 years.  Contact us or use the helpful Links on this website for realty related resources and new property listings for sale and Lease, homes, condos, income property and commercial real estate are all covered by our office.  

$1,000 Lender Credit Could Be Yours

by Tom Stachler,ABR,CDPE - Group One Realty Team

You qualify for this $1,000 lender credit as a buyer or seller. See the details below in the flyer and call us for your Home Buying needs. 

 

Tom Stachler is a licensed broker serving the Ann Arbor, Chelsea, Saline and Dexter Real Estate Michigan Markets.  Please refer to the helpful Links above for more information about Buying or selling real estate, homes and condos when searching for one of the area's best real estate brokers. 

Buying a Home? Factor These Into Your Interest Rate Calculations

by Tom Stachler,ABR,CDPE - Group One Realty Team

Buying a Home? Factor These Into Your Interest Rate Calculations

The mortgage process can be complicated if you jump in without any prior knowledge on home-buying and lending. The best tool you can arm yourself with is an understanding of how your mortgage interest rate is calculated.

Credit can make or break you. 

Your credit score will determine how reliable you are in the lending world. The higher your score, the lower your interest rate will likely be. Check your credit on one of the three major credit reporting agency sites—TransUnion, Experian and Equifax—or your credit card company may have a free credit report service (although these aren't as reliable). Improve your FICO score for a better chance at a lower interest rate.

Factor in size and location.

  • State or County: Even your place of residence can affect your rate.
  • Local Mortgage Lenders: Shop around. Interest rates can vary from company to company even if they're located in the same town.
  • Loan Size: The size of your home can also impact your interest rate. The bigger the loan, the higher your interest rate will be if you're not putting more money down.
  • Down Payment Size: Your mortgage interest rate may also depend on how much you're putting down and if your loan includes closing costs and private mortgage insurance (PMI). Putting down less than 20 percent can increase your risk factor and may require PMI, but your interest rate may be lower depending on the loan.

Not all loans are created equal.

Loan Length: Your loan terms play a bigger role in interest rate calculations than you think. Have you decided whether you want to pay off your loan in 15 or 30 years? You may pay more per month with a shorter term, but you'll be paying less interest over the life of your loan. Short-term loans may also have a smaller interest rate.

Fixed or Adjustable: You'll also have to consider whether a fixed- or adjustable-rate loan is right for you. Your interest rate can change over time if you choose an adjustable-rate loan. It may start off low or fixed, but can increase over time depending on market conditions. Fixed-rate loans, however, will have a higher interest rate attached to them.

Loan Type: Interest rates can also vary according to your loan type. Choosing a loan can be overwhelming, but a local lender should be able to provide you with the best options. Some of the more popular loans are conventional, FHA and VA loans. While FHA loans have less down payment restrictions and a smaller interest rate, your monthly payment can be more expensive due to the required PMI added on. VA loans can have smaller interest rates and don't require PMI like FHA does. Conventional loans are widely accepted in the real estate industry as dependable, but your interest rate may be higher.

Tom Stachler is a Michigan licensed real estate Broker and Builder working in the Ann Arbor, Saline and Dexter Real Estate markets.  Please refer to the helpful Links above for more information about Buying or selling real estate, homes and condos when searching for one of the area's best real estate brokers. 

Mortgage Rates: How Low Will They Go?

by Tom Stachler,ABR,CDPE - Group One Realty Team

How low will they go? Mortgage rates limboed down again this week, with the 30-year, fixed rate—3.88 percent—marking a new low for 2017, according to Freddie Mac’s recently released Primary Mortgage Market Survey® (PMMS®). Both the 15-year, fixed rate and the 5-year, Treasury-indexed hybrid adjustable rate moved down to 3.17 percent.

“The 30-year mortgage rate fell two basis points to 3.88 percent this week,” says Sean Becketti, chief economist at Freddie Mac. “However, the majority of our survey was conducted prior to Tuesday’s sell-off in the bond market which drove Treasury yields higher. Mortgage rates may increase in next week’s survey if Treasury yields continue to rise.”

Tom Stachler is one of the Ann Arbor and Saline Michigan's leading real estate brokers with over 25 years of experience in the Ann Arbor and surrounding areas.  Check out the MLS Listings link above for a list of thousands of real estate listings for sale in Michigan.

30 Year Mortgage Rate Dips Down for Third Straigh Week

by Tom Stachler,ABR,CDPE - Group One Realty Team

The 30-year fixed mortgage rate this week averaged 4.10 percent, while the 15-year fixed mortgage rate averaged 3.36 percent. The 5-year Treasury-indexed hybrid adjustable mortgage rate averaged 3.19 percent.

“The 10-year Treasury yield was relatively unchanged this week, while the 30-year mortgage rate fell four basis points to 4.1 percent,” said Sean Becketti, chief economist at Freddie Mac, in a statement on the survey. “After three straight weeks of declines, the 30-year mortgage rate is now barely above the 2017 low. Next week’s survey rate may be determined by Friday’s employment report and whether or not it can sustain the strength from earlier this year.”

Look for the lowest rates using Ann Arbor's best lenders by visiting www.LendAnnArbor.com for a list of the area's best mortgage brokers.  The lenders are from many different companies and all have at least 15 years of experience and are either a vice president or branch manager.  

 

Tom Stachler is one of Saline Michigan's leading real estate brokers and buyers agents with over 25 years of experience in the Ann Arbor and surrounding areas.  Check out the MLS Listings link above for a list of thousands of real estate listings for sale in Michigan.  

 

The Nuts and Bolts of Home Construction Loans are Complex

by Tom Stachler,ABR,CDPE - Group One Realty Team

The complexities of home construction loans can hit you like a falling two-by-four. Be sure you understand the intricacies before you apply.

Two Types of Construction Loans
There are two main types of home construction loans:

Construction-to-Permanent: With these loans, the lender advances the money to pay for construction. After the home is built, the same lender rolls the loan balance into a standard mortgage. This is by far the more popular option.


With a construction-to-permanent loan, there is one closing. During construction, you pay only interest on the outstanding loan balance. It converts into a mortgage after the home is built. You lock a maximum mortgage rate at the beginning, when construction begins.Stand-Alone Construction: With these loans, it’s often the lender that advances money to build the house. When construction is finished, you get a mortgage to pay off the construction debt.

A stand-alone construction loan could be worthwhile if it allows a smaller down payment. Because this type of loan doesn’t allow you to lock a maximum mortgage rate in advance, you risk a rise in interest rates. Another disadvantage is that your circumstances could change during construction, making it impossible to qualify for a permanent loan—and you pay for two closings: once on the construction loan, and later, on the mortgage.


Your down payment is likely to be at least 20 percent of the loan amount, although some lenders go as low as 10 percent. The lender will determine whether you can afford the loan payments during construction while you’re paying the Rent or mortgage on your current home.More Difficult to Qualify
Qualifying for a construction-to-permanent loan could be more onerous than getting a regular mortgage. This is because the lender doesn’t have the completed house as collateral to back the loan during the construction period.

Have Adequate Savings
The lender will make sure you have savings to pay for unexpected costs. “There are always cost overruns when you are building a home that you may not know about until you are into it. We don’t want them to use every last dime they have before they start,” says Dennice Henshaw, East Side division manager for Washington Federal in Seattle, Wash.


Do Your Due Diligence on the BuilderCost overruns tend to come about because borrowers have a tendency to change their minds about what they want as construction proceeds.

An important aspect of building your home is choosing the right builder. Find one that has built the kind of house you want in terms of price, style and size. Look into the builder’s credentials with the local home builders association and ask for references from previous clients. You could also see if there are any complaints against the builder with the Better Business Bureau.

Typically, your lender will look into the builder’s credit standing, financial situation and licenses, as well as the track record for building similar homes.

Ongoing Inspections
Lenders will conduct routine inspections as the home is built. During this period, the lender pays the builder in stages—called “draws”—and usually sends an appraiser or inspector to make sure that construction proceeds as planned.

Cynthia DeLuca, group mortgage manager for BB&T in Raleigh, N.C., says, “Our clients could get upside down, where they have 50 percent of the loan but the house is only 25 percent done. We look at how much it is going to cost to complete the house to try to stay on track.”

Typically, you sign off on each draw request so that you are kept informed how the work is proceeding.  Check out the area's best lenders before you decide on your next loan at www.LendAnnArbor.com .  Each mortgage broker is either a vice-president or branch manager and all have been in the business for at least 15 years of experience.  

Tom Stachler is one of Ann Arbor's leading realty brokers having over 25 years of experience.  Get the latest listing information directly from the board of realtors MLS system by clicking on the MLS Listings tab above.  More real estate related information and Links can be had under the resources tab above.  

 

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3 Tips for Investing in Residential Real Estate

by Tom Stachler,ABR,CDPE - Group One Realty Team

3 Tips for Investing in Residential Real Estate in 2017

Businessman presenting financial analysis with charts generated by big data displaying international success and dollar signs

A great deal of the wealth of the top one percent of Americans is built on real estate.

Aside from owning your Home, it used to be that only the wealthy and well-connected were investing in real estate. Unless you knew the right people and were willing to put up a big chunk of money, there were relatively few methods for the average person to invest in real estate aside from just Buying properties and renting them out for income.

Real estate investment has, however, changed dramatically over the last couple of decades. Today individual investors have access to many different real estate-related investments. Moreover, new platforms for investing in residential real estate (that don’t involve the headache of being a landlord) have also proliferated in the last few years.

Here are three ways for individual investors to make profits in real estate today.

Invest in REITS

Real estate investment trusts (REITs) are an increasingly popular option for real estate investing. You can purchase shares in a public REIT just like you buy mutual funds or stocks. The business model of a REIT is owning and/or developing income-producing assets in a particular segment of the real estate market. For example, you can invest in a REIT focusing on commercial real estate, maybe malls or office buildings, or a REIT specializing in residential real estate like apartments or condos.

Many investment advisers suggest using REITs in your portfolio to balance out stock and bond funds and mitigate portfolio risk as this asset class often does well when other investments are performing poorly.

Before investing in a REIT, make sure to understand how the trust is designed and how value is derived from its holdings. Keep in mind that the performance of a REIT is based on cash flow and profits from selling properties, and may not be impacted much by factors that typically drive the performance of stock and bond funds.

While most investment advisors today suggest considering real estate as an alternative investment, the majority suggest it should represent no more than 10-20 percent of your portfolio.

Take a Closer Look at Real Estate Investment Partnerships

Another way to invest in real estate is real estate investment partnerships. Current laws allow investment partnerships to be structured in a number of ways, including tenant in common projects, general partnerships, or limited liability partnerships (LLP) or limited liability corporations (LLC). These structures each have their own advantages and disadvantages, so always do your due diligence on your partners and potential liabilities before investing in a partnership.

Take a close look at how decisions will be made, and how managing partner/partners will be selected (and how they can be removed). Always insist on a written real estate partnership agreement, which should be reviewed by an attorney with experience in real estate transactions.

Limited liability partnerships are frequently established having an experienced property manager or real estate developer as the general partner. Investors are used to provide financing for the projects, and they are typically brought on as limited partners.  

IRA FUNDED PORTFOLIOS

Take a close look at using some of your IRA proceeds to invest in realty assets.  Call Tom to discuss this investment instrument and also Click Here to View Residential Income Properties. 

 

Diversify Your Portfolio with Peer-Based Residential Real Estate Platforms

You can also invest in residential real estate through peer-to-peer lending platforms. Just a few years ago, almost all P2P lending platforms making real estate loans focused on commercial properties.

Fundrise (equity crowdfunding) was one of the first firms to offer residential real estate loan products, launching in mid-2014. SoFi has also recently begun mortgage underwriting. With SoFi, however, nearly all of these P2P home loans are for larger amounts to borrowers with excellent credit.

Other broader peer-based lending platforms based on residential real estate and mortgages that have launched recently include Elevate (UK), LendInvest (UK) and Income& (US).

Academics argue the real estate investment sector has matured enough to become a new asset class along with stocks, bonds and cash. That’s why it’s not surprising that most investment advisors suggest real estate should be a substantial part of all larger portfolios today.

Tom Stachler is a licensed Broker & Builder plus marketing expert for commercial, condo and homes in the Ann Arbor Michigan community and surrounding areas such as Dexter, Saline, Chelsea, Milan Ypsilanti and Pinckney real estate markets.  Note the Search Properties link above to view a complete Inventory of homes and condos for sale.  Also click on the resources tab above for other helpful information Linkscontractor discounts and sources.   Have questions want sell your home or get a price ?  Go to  www.MyPrice.guru to get started and see comparable home sales.  Or maybe you want to search for property and view an updated MLS inventory report created for those Buying properties .  Hit the contact me link to the right or call us with any questions because we would love to hear from you.  We also have a Contractor Discount page here on our website or many helpful Links in the tab above for more resources.  

Ann Arbor Real Estate for Sale, Saline Real estate for sale, whatever the need in the surrounding areas, we have it using the navigation tabs above.

Difference of Opinion Widens Between Appraisers and Homeowners

by Tom Stachler,ABR,CDPE - Group One Realty Team

Appraisers and homeowners are less eye-to-eye on Home value for the first time in six months, with the gap between their opinions widening in December to 1.33 percent, according to Quicken Loans’ National Home Price Perception Index (HPPI). The difference in opinion, says Quicken Loans Chief Economist Bob Walters, helps to impart understanding for homeowners, who often hold their homes at higher value than appraisers.

“It’s our hope that homeowners use the HPPI’s unique data as an insight into their local housing market,” says Quicken Loans Chief Economist Bob Walters. “When consumers have a better grasp of their local market conditions, it can help influence their expectations and ultimately lead to a smoother mortgage or home sales process.”

The latest Quicken Loans National Home Value Index (HVI), at the same time, declined 1.19 percent.

A summary of the HVI:A summary of the HPPI:
Americans’ expectation of their home’s value was an average of 1.33 percent lower than appraisers who valued their home, according to the National HPPI. The gap between actual appraised value and opinions had been narrowing since June, but December’s perception difference of 1.33 percent erases all improvement made in the last few months. Despite the drop in the composite value, significant variations in value continue in various regions of the country, highlighting the regional nature of the real estate market. (For instance, estimates from Philadelphia homeowners were 2.94 percent higher than appraised values; on the other end of the spectrum, appraisals are outpacing expectations of Denver homeowners by 3.04 percent.)

As snow began to fall in much of the country, nationally, so did home values. The average appraisal value dropped 1.19 percent from November to December, according to the National HVI. Despite the dip from the previous month, home values continued to climb higher year-over-year by 3.85 percent nationally; however, this growth is a slower pace than the 5.28 percent annual increase in November. Appraised values showed strongest annual growth in the West, while the Midwest had the slowest gains.

“Home value growth has been mostly driven by enthusiastic buyers vying for a smaller than usual inventory of properties,” says Walters. “Appraised values have dipped along with the seasonal decline in sales around the winter months. It’s yet to be seen if value growth will build as sales rise in the spring, or as construction increases.”

 

Tom Stachler is a licensed Broker & Builder plus marketing expert for commercial, condo and homes in the Ann Arbor Michigan community and surrounding areas such as Dexter, Saline, Chelsea, Milan Ypsilanti and Pinckney real estate markets.  Note the Search Properties link above to view a complete Inventory of homes and condos for sale.  Also click on the resources tab above for other helpful information Links, contractor discounts and sources.   Have questions want sell your home or get a price ?  Go to  www.MyPrice.guru to get started and see comparable home sales.  Or maybe you want to search for property and view an updated MLS inventory report created for those Buying properties .  Hit the contact me link to the right or call us with any questions because we would love to hear from you.  We also have a Contractor Discount page here on our website or many helpful Links in the tab above for more resources.  

Ann Arbor Real Estate for Sale, Saline Real estate for sale, whatever the need in the surrounding areas, we have it using the navigation tabs above.

Current Home Mortgage Rates and Interest Trend for 2017

by Tom Stachler,ABR,CDPE - Group One Realty Team

Average fixed mortgage rates climbed again for the eighth week in a row following the Federal Reserve’s decision to raise the key rate, according to Freddie Mac’s Primary Mortgage Market Survey® (PMMS®), with the 30-year fixed-rate averaging 4.30 percent with an average 0.5 point—up from last week’s 4.16 percent.

“A week after the only rate hike of 2016, the mortgage industry digested the Fed’s decision and this week’s survey reflects that response,” says Sean Becketti, chief economist at Freddie Mac. “Following Yellen’s speech last Wednesday, the 10-year Treasury yield rose approximately 10 basis points. The 30-year mortgage rate rose 14 basis points to 4.30 percent, reaching highs we have not seen since April 2014.”

The 15-year fixed-rate, according to the Survey, averages 3.52 percent with an average 0.5 point, also up from last week’s 3.37 percent. The 5-year Treasury-indexed hybrid adjustable-rate mortgage moved up, in addition, to an averages3.32 percent with an average 0.4 point.


Average mortgage rates exceeded 4 percent for the first time this year after the election. The Fed expects to raise the key rate three more times in 2017.  For a list of the Ann Arbor Area's Top Mortgage Lenders visit www.LendAnnArbor.com for new Home purchase or re-finance options.  

Tom Stachler is a licensed Broker and Builder marketing condo and homes in the Ann Arbor Michigan community and surrounding areas such as Dexter, Saline, Chelsea, Milan Ypsilanti and Pinckney real estate markets.  Note the Search Properties link above to view a complete Inventory of homes and condos for sale.  Also click on the resources tab above for other helpful information Links, contractor discounts and sources.   Have questions want sell your home or get a price ?  Go to  www.MyPrice.guru to get started and see comparable home sales.  Or maybe you are searching for homes and want to view an updated MLS inventory report created for those Buying properties .  Hit the contact me link to the right or call us with any questions because we would love to hear from you.  We also have a Contractor Discount page here on our website or many helpful Links in the tab above for more resources.  

Ann Arbor Real Estate for Sale, Saline Real estate for sale, whatever the need in the surrounding areas, we have it using the navigation tabs above. 

Information and Basics about Commercial Mortgages and Loans

by Tom Stachler,ABR,CDPE - Group One Realty Team

Information and Basics about Commercial Mortgages and Loans

Buying real estate for your small business? It's an exciting move, but also a stressful one.

Expanding to a new location or just renovating your current space is a big step for a small business owner--so you should know the ins and outs of the process before you get too far in over your head.

By learning how to navigate commercial real estate loans, you'll be well equipped to get the best rate and terms for your business. This way, you can get the most out of your commercial real estate loan and save capital for your business.

So, let's start with the basics: How do commercial real estate loans work?

Use this guide to find out.

What is a Commercial Real Estate Loan?

Commercial real estate, as you might've guessed, is real estate that's used only for business purposes. So if you operate your small business through a retail store or office space, you're working out of commercial real estate.

If you have plans to purchase new or existing commercial properties, you can take out a commercial real estate loan to help finance the purchase--and any development or construction after the fact.  Check out the commercial lenders at www.LendAnnArbor.com

Commercial real estate loans are typically options for certain business entities, like a limited liability company or an s-corporation. All this is to say that businesses take out commercial real estate loans, not individuals.

How Do Commercial Real Estate Loans Work?

So, commercial real estate loans help you pay for the sky-high price tags that come attached to your new business property. Got it.

How do they work?

Technically, commercial real estate loans are mortgage loans secured by liens on the commercial real estate you're purchasing--rather than on residential property.

Let's take a step back. What's a lien?

Well, in this specific case, a lien is a legal right that an owner of a property gives to a creditor, serving as a guarantee for the repayment of a commercial real estate loan. If the owner can't fulfill the debt repayment, that credit might be able to seize the asset secured by a lien.

In the end, a lien just gives your commercial real estate lender some protection against the risk that you default on your loan and can't pay them back.

When you take out a commercial real estate loan, you should absolutely expect to have a lien put on at least your business property. But you should also be prepared to make a down payment on your commercial real estate loan.

Before funding your loan, major lenders will typically require a down payment between 20 - 30% of the property purchase price.

Now for the nuts and bolts of commercial real estate loans: repayment terms, interest rates, and fees.

Repayment Term and Schedule

Consider your average residential mortgage--like one you might have on your Home.

A typical residential mortgage is a type of amortized loan, where you repay the debt in regular installments over a fixed period of time, say 30 years.

Unlike residential loans, commercial real estate loans come with two types of terms: intermediate-term loans of 3-5 years or less and long-term loans that last for 5 to 20 years.

Also, a commercial real estate loan might come as an amortized loan--the one you know well--or as a balloon loan.  Many of these loans the lender will rollover provided they feel the property is being properly managed and the borrower financials are still acceptable to the lender.  This is most common.  

An amortized loan gets repaid in fixed installments until you've fully paid the lender back, plus interest.

A balloon loan, on the other hand, requires you to make one big payment at the end in order to pay off your remaining principal.

Let's dig into how balloon commercial real estate loans work.

When you take out a balloon commercial real estate loan, you're given a term typically ranging from 5 to 7 years. You'll have fixed monthly payments through that term, but those payments aren't set up to cover the entire loan repayment. Instead, the monthly payments are calculated as if the loan is a traditional 25- or 30-year mortgage--like a residential mortgage. At the end of your 5- to 7-year term, you'll have paid off only a portion of your principal balance, so the rest is due all at once.

If you're considering a balloon commercial loan option, know this: that last payment could be very high.

You should really only sign on the dotted line for a balloon loan if you know you'll have the cash on hand when it comes time to make the final payment. If you don't, you'll have to refinance your loan or sell your business property to make the balloon payment.

Interest Rates

As with any small business loan, the actual interest rate you get on your commercial real estate loan depends on your type of business, its financial health, and your creditworthiness.

But in general, commercial real estate loans tend to come at a steeper interest rate than a residential mortgage would. Businesses are just riskier to lend to, especially if you're just starting up. Plus, most businesses have less established credit histories than individuals.

You should also know that your interest rate will depend on the kind of real estate lender you work with. Life insurers, for instance, have rates ranging from 3.35 - 4.3%, while banks and credit unions offer rates at 3.35 - 6%. Check out the current averages for the various lender types to make sure you know all your rate options.  Also, some lenders offer loans a prime or up to 1.5 points over prime depending on loan size and client.  

Your interest rate will also depend on your loan-to-value (LTV) ratio. An LTV ratio measures the value of a loan against the value of the property purchased.

Say you're purchasing a $100,000 piece of property. Commercial real estate lenders typically require borrowers to put a down payment of about 20 - 30% of the purchase price. So, you've covered a small portion of the cost and the lender is covering the rest of it by extending you the loan. In this case, the loan-to-value ratio is 70 - 80%.

Here's where your interest rate comes in. If you have a high LTV, you'll likely have a higher interest rate. The lender has more skin in the game, so they have more to lose if you default on your commercial real estate loan. On the other hand, if you've paid more of the purchase price in the form of a down payment--and you have a lower LTV--you'll have a lower interest rate on your loan. You've taken on more of the equity in the property, meaning the lender takes on less risk.

Fees

On top of interest rates, commercial real estate loans will come with fees. Most commercial real estate loans have upfront fees that you'll need to pay.

Upfront fees are bundled into the overall cost of the loan--covering the property appraisal, legal costs, loan application, loan origination, and survey fees. Some commercial real estate lenders will want borrowers to pay upfront fees before the loan is approved. Others will just apply the fees annually.

You should also be aware of fees associated with paying your commercial real estate loan off early. You might have a typical prepayment penalty, but there could also be an interest guarantee, a defeasance, or just a lockout barring you from paying early. All in all, a lender wants to preserve their anticipated gain on a loan, so they might charge you for paying early.

Before you commit to your commercial real estate loan, always ask the lender to clearly explain any and all fees that will be a part of your total cost of borrowing. You wouldn't want to be hit from behind on hidden fees down the line.

Where to Find Commercial Real Estate Loans

Now that you know the basics on commercial real estate loans, where can you find one?

Well, a few different types of lenders offer this kind of financing for small businesses.

Commercial banks, credit unions, commercial mortgage-backed security (CMBS) lenders, life insurers, and the Small Business Administration can all help you secure a commercial real estate loan.

But as a small business owner, your best bet might be to knock on the SBA's door first.

Why You Should Work With the SBA?

The SBA offers commercial real estate financing through their CDC/504 Loan Program. A CDC/504 loan is made specifically for purchases of fixed assets.

A CDC/504 loan from the SBA is either 10 or 20 years. An SBA loan gives borrowers a fixed rate instead of the prime lending rate. This works out better for the borrower because your interest rate is fixed at an increment above the current 5- and 10-year U.S. Treasury yields. In the end, it'll be much easier for you to calculate the exact amount you need to repay.

Almost any owner can apply for a CDC/504 loan as a source of small business funding. To qualify, small business owners will first need to present a feasible business plan and demonstrate some business management expertise. Other noteworthy eligibility requirements are that your business must be worth less than $15 million and have a net income of less than $5 million after taxes.

You'll also need to show your projected cash flow data to prove that you'll be able to repay the loan. And finally, you'll have to prove that your business doesn't have the financial capacity to purchase the real estate with your own funds.

Applying for a Commercial Real Estate Loan

Gearing up to apply for a commercial real estate loan? You'll need to get your financial ducks in order first.

Commercial mortgages tend to have a more rigorous underwriting process than residential loans do.

With commercial real estate loans, having a clear and detailed business plan is crucial. Lenders will not only scrutinize your business, but they'll also carefully consider the property you intend to buy and your plans for using it. Make sure you spell all of this out in your business plan.

Depending on the size of the commercial loan, you'll also need to prove your business's financial strength. Be prepared to submit 3 to 5 years worth of financial documents, like your asset statements, tax returns, corporate accounting reports, and any other relevant information. You'll also need to show your personal financial information and personal credit history.

The Bottom Line with Commercial Real Estate Loans

As with any business loan, make sure you shop around for multiple offers from different lenders.

Your commercial real estate loan will be with you for the long haul, so you should be confident that you're getting the best terms and rate for your business.

Once you've found a good fit for your business, you're well on your way to getting the real estate you need to bring your business to the next level.

Tom Stachler is a licensed Broker and Builder marketing homes and properties in the Ann Arbor Michigan area.  Also search for properties, houses, and condos for sale in Saline, Dexter, Chelsea, Milan and the Ypsilanti real estate markets.  Check out the handy Links and nav tabs above for realty related information and and MLS inventory access above.  

commercial loan information and rates, ann arbor, michigan, saline, mortgages, property, business, sba, loans

 
 

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