Can I find financing to buy rental real estate?
The biggest challenge for real estate investors right now is access to money to finance or refinance their investments.
This newsletter will summarize financing options for different kinds of property to help clear some of the smoke in the financial air. Bear in mind that we are in a fluid, ever changing market place. What is accurate today will not be accurate tomorrow. The information in this article should be used as a baseline for gathering more current information, not the final say on mortgage rates.
2 – 4 Plexes:
Assuming a $300,000 purchase of a four-plex, A bank will require a down payment of at least 25% ($75,000) leaving a balance (loan amount) of $225,000. This could be borrowed at 5.5% over a 30 year term with payments of $1,277.53 per month. The banks are expecting a buyer to have rental experience in order to have the rental income counted towards the debt to equity ratio. Minimum credit score of 620 may be required. Best pricing is with credit scores over 740. Amortizations of 10, 15, 20 and 30 years are available, as are interest only payments.
Full documentation is required, i.e. tax returns for the preceding two years and verifiable income and expenses for the property. There will be loan fees of at least 1 percent plus the normal closing costs, and a full appraisal and inspection will be required.
Fixers
Loans for fixers are not available unless the borrower is purchasing an owner occupied property. If you are purchasing the property to live in, you can investigate the FHA 203K loan to see if it will work for you. If you have a relationship with a local bank you might be able to swing a small line of credit to rehabilitate a property.
Apartment Properties
| Term/Amortization | Typically 10 year call with 300 or 360 month amortization |
| Loan size | $500, 000 – $5,000,000 |
| Interest rate | Depends on program, if ARM or Fixed 5.7% – 7% |
| Loan Fee | 1% to 1.5% |
| Assumption | Depends on Bank – may be accomplished with 1% fee and approvals |
| Prepayment | Many options, yield maintenance or 5,4,3,2,1 for example |
| Loan Costs | Range from $3000 to $13,000 depends on financing source |
| Rate Lock | 60 – 90 day rate locks available with a fee |
| Recourse | Most deals today require recourse |
| Loan to value | 60 – 75% the more money you put down the better rate you can get |
| Impounds | Taxes ,Insurance and capital repairs are common |
| Underwriting | 1-20 DCR to 1.30 DCR |
| Other | Single purpose borrowing entity required.In some cases a bank may require that the borrower must have readily available and verifiable liquidity of 250% of the annual debt service. They may also require a minimum of two rental properties with an overall property Debt Coverage of 1.30. Many banks will not give you cash from a refinance. |
| CAP rate | Typically 6.75 – 7.5 minimum, depends on NOI |
On deals over $3 Million there is also financing available from Fannie Mae, Freddie Mac and HUD. Their terms are as follows:
| Program | Freddie | Fannie | HUD |
| Interest Rate | 5.85% | 5.85% | 5.65% |
| Term | 10 | 10 | 35 |
| Amortization | 30 | 30 | 35 |
| Prepayment Penalty | Yield Maintenance | Yield Maintenance | Step down |
| Debt Coverage ratio | 1.30 | 1.30 | 1.17 |
| Loan to value Ratio | 75% | 75% | 85% |
These loans can take up to 6 months to close and because the government is involved, they are very complicated and detailed in their approach. You want to use a lender that has lots of experience with these programs because they are so challenging.
Commercial Property ( Office, Retail and Industrial buildings)
| Term/Amortization | Typically 5 year call or adjustment to the rate with 300 month amortization |
| Loan size | $500, 000 – $5,000,000 |
| Interest rate | Depends on program, if ARM or Fixed 6.5% – 7.25% |
| Loan Fee | 1% to 2.0% |
| Assumption | Depends on Bank – may be accomplished with 1% fee and approvals |
| Prepayment | Many options, yield maintenance or 5,4,3,2,1 for example |
| Loan Costs | Range from $3000 to $13,000 depends on financing source |
| Rate Lock | 30-85 day rate locks available with a fee |
| recourse | Most deals today require recourse |
| Loan to value | 65 – 75% |
| Impounds | Taxes ,Insurance and capital repairs are common |
| Underwriting | 1-20 DCR to 1.30 DCR |
| Other | Single purpose borrowing entity required. In some cases a bank may require that the borrower must have readily available and verifiable liquidity of 250% of the annual debt service. |
| Cap rate | Typically at least 7.5 CAP depends on cash flow |
Owner user properties- SBA Loans as of April 20, 2009
There are two programs commonly available, the SBA 504 and the 7(a) program.
The SBA portion of both programs has some great fee incentives this year. The 7-a fees have been waived entirely and the 504 SBA fees have been trimmed from 2.85% to 0.65% The bank fee for the 504 loan has not changed.
| Estimated total Project | $2,200,000 | |
| Down Payment | 10% | $220,000 |
| Wells Fargo Loan | $1,100,000 | |
| SBA 504 Loan | $880,000 | |
| As of April 20, 2009 | Wells Fargo | SBA 2nd |
| Loan amount | $1,100,000 | $880,000 |
| Interest Rate | 5.75% | 5.25% |
| Fixed or Variable | Fixed | Fixed |
| Interest rate adjustments | 3 years | none |
| Bank and SBA Loan Fees | 1.55% | .65% |
| Amortization ( Years) | 25 | 20 |
| Bridge Loan Fee | $1,000 | |
| CDC Document Fee | $2,750 | |
| Appraisal | $3,000 | |
| Loan Fees | $16,500 | $5,720 |
| Environmental Report | $2,200 | |
| Total Bank Fees( closing not included) | $23,200 | $8,470 |
| Total Estimated Cash required | $243,200 | |
| Total Amount financed | $1,100,000 | $888,470 |
| Monthly Payment | $6,920 | $5,987 |
| Combined Payment | $12,907 |
As you can see it is not easy to get money to invest with. Most importantly with the exception of the SBA loans, you need to make larger down payments. This is a huge shift in how investors we have purchased real estate over the past 10 years, where leverage and 20 or 25% down deals were the norm with very low debt coverage ratios.
Refinance
If you can get the money it would be a great time to refinance your investments. 
The question is will the banks give you cash out or just allow you to improve your financial position on your existing property investments.. We know that there are many new opportunities in the market place, where banks are foreclosing property. Finding the cash to take advantage of this opportune time is the challenge.
Conclusion
This clearly is a good time to reposition your debt to ride out the market. If you can refinance, you should. If you want to buy, be prepared for a challenge and a difficult transaction, and don’t be surprised if and the end of the road, the bank cannot perform. You may want to seriously consider two banking options for every property you want to buy. If the first bank cannot perform you can assign your appraisal and inspections and still close a deal.
We are in an interesting time. Be thoughtful, pay attention to the market place and don’t be surprised as interest rates rise in the next year as the Fed needs to accommodate inflation.
Thank you
I need to thank the following bankers who helped me with information.
Plexes:
Catalin Hreniuc, Discovery Financial, 503-254-6677, Catalin@dfmortgages.com
John O’Donnell, RKO Capital LLC, 503-702-6524, John@rkocapital.com
Apartments:
Vic Baker, Baker Mortgage, 1-503-390-4914, vmbaker@comcast.net
Steve Mozinski, Chase Commercial Term Lending, 503-227-9764, steve.mozinski@chase.com
Rob Allfleck, Capmark Finance, 1-360-356-0215, rob.affleck@capmark.com
Commercial:
Doug Marshall, CCIM, Marshall Commercial Lending, 503-614-1808, doug@marshallcf.com
Randy Stapelton, RKO Capital LLC, 971-221-5551, randy@rkocapital.com
SBA:
Jess Richardson, Wells Fargo, 503-358-3353, SBAloans@usa.com
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This entry was posted on Tuesday, May 12th, 2009 at 12:52 pm and is filed under Articles, Investing, Refinance, Sales & Leasing. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
