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Negotiate With a Lender: Commercial Property Loan

Commercial Real Estate Loan

Questions With a Lender for a Commercial Property Loan

A piece of property is considered to be commercial property when it is five units and above.  This includes apartments, office, retail, warehouse, mixed use and flex space.  A completely different lender and lending guidelines apply to these properties.  It is critical to your success to make sure that you are working with a lender that specializes in commercial loans.

Ask a Lender These Questions:

“What do they have an appetite for?”  This means what they are lending on in regards to the categories that are mentioned above.

“What is the commercial loan based on, the loan to value or the debt coverage ratio?”  It can be one or the other or it can be both.

“What are the terms that you are offering on commercial loans?” It could be 70% LTV for 25 yrs at 5% and a balloon in 10 yrs.  Or it could be a debt coverage ratio of 1.25 for 25 yrs at 5%.  These are two different kinds of loans.

For example, let’s say that you have a property that brings in a NOI of $2000 a month and the bank uses a 1.25 DCR.  The way that you determine the DCR is that you take the Net Operating Income and divide that by the DCR rate.  So, in our example, we have a $2000 NOI and we divide that by 1.25.  That gives us $1600 a month for Principle and Interest.  If you subtract the monthly payment from the NOI you have $400 a month in cash flow.  To determine your annual cash flow, simply multiply by 12.  This property has $4800 in cash flow for the year.

“What is the minimum credit score for this commercial piece of real estate?”  Usually the bank requires a credit score around 725, but keep in mind that each lender is different.

“What is the debt to income ratio?” Currently lenders are doing approximately 50% maximum debt to income ratio.  That means you are allowed to spend 50% of your income towards debt.  Debt is principal and interest.  Because of Dodd/Frank there is the possibility that the debt to income ratio may be lowered to 43% in the future.  Keep in mind that every bank, savings and loan, & credit union has their own loan conditions.

The sixth question you want to ask if you are looking at a loan which is based on debt coverage ratio is “What does the bank require in terms of vacancy rates?”

“What does the bank require in terms of a cash reserve?” Cash reserve can be based on a percentage of the rent. Cash reserve can be based on a dollar amount per unit.  Cash reserves are for capital improvements over the investment period that you are analyzing.  These numbers take into account cash reserve, utilities, and so forth and reduce the amount of money that you are making and that is called net operating income.

“How much money do you need to set aside for management?”  This is a critical number in determining your Net Operating Income.

Net Operating Income is determined when you take the Gross Rents and subtract:

  • The vacancy factor
  • The taxes and insurance
  • The cash reserve
  • The utilities
  • The maintenance
  • The management
  • And any additional expenses

Once you have subtracted all of these expenses, you have the Net Operating Income.

Cash on Cash Return

The next thing that you want to evaluate is your cash on cash return.  Take the annual cash flow of $4800 from the example above and divide that by the initial investment to determine how much cash on cash return you are making for that piece of commercial real estate.

So what does the initial investment entail?  The investment entails your down payment.  So let’s look at the payment again $1600 P&I for 25 yrs at 5%.  By using a financial calculator you can determine that the loan amount is $298,050.  So if the property is selling for $372,563 for example, that would mean you had to put down $74,507 or your investment.

Therefore, a $4800 Cash Flow divided by $74,513 yields a 6.4% cash on cash return.  That means at the end of the year you are making 6.4% more than what you invested.  In commercial real estate, you are looking for how much cash flow you are getting as part of your financial return.

The financial plan is to get the $74,513 down payment to invest in commercial real estate.  There are several ways to get the down payment for a commercial property.

Acquiring a Down Payment

One way is to buy houses below market value, like a short sale or a foreclosure, and then sell them at market value for a profit. You will typically have to do multiple deals to generate a large enough down payment for the commercial property.  Once you have enough money, then buy the commercial piece of real estate.

Another way to do it would be to buy a house at a discount, then fix the house up, then sell the house at market value. You may have to do multiple deals to generate enough money for the down payment.

A third way to accumulate that $74,513 is to buy houses in markets that are appreciating, then rent those houses, hold them for a few years until the value increases by that $74,513, then 1031 exchange into a commercial piece of real estate. You don’t have to 1031 the property. You can just sell it, take the money, and move the money into a commercial piece of real estate.

A fourth way would be to bring in investors for the $74,513 and then share the profit or make them an equity partner in that venture giving them a piece of the cash flow and/or appreciation and/or principal reduction and/or tax benefits.

Richard Maryanski and Erik Maryanski
Rich Dad Education Elite Trainers and Mentors

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Mortgage Loans

Mortgage Loan

Applying for a Mortgage Loan

What kind of loans do the banks have for single family homes up to four units for non-owner occupants? 

There are loans for owner occupied and non-owner occupied buyers.  There are loans for buy fix and sell properties; there are loans for buy fix and hold properties too.  As the investor, you need to find out what kind of products each bank has so that you know which kind of loan you are interested in.

Once the bank explains what kinds of loan products are available, you want to find out the terms they have for that product. Some of the terms to look into are the loan to value, the interest rate and the length of the loan.

Once the bank determines the loan to value, rate and the term of the loan, then you can estimate the loan amount they will give you for a certain property.  For example, a $200,000 property with an 80% LTV is $160,000.   This lets you know how much money you will need to bring to the closing table.  You also want to find out if the loan is based on the value of the property or on the purchase price.

You can estimate the monthly payment on a loan using a loan calculator.  However, you need to know the length of the loan as well as the interest rate.  You also need to remember that the payment will be determined by whether or not the loan is interest only or fully amortized.  If you are keeping the property as an income property, you need to figure in taxes and interest as well.

Most banks have similar qualifications in terms of what they want from the borrower.

  1. The lender wants to see two to three years of tax returns.
  2. The lender is looking for a debt to income ratio of 38 – 45%.
  3. The lender is looking for a certain credit score.

Debt, for example, includes credit card payments, student loans, car loans, furniture loans, etc.  If you are already at your 38-45% of your gross pay, then you will not be able to make a mortgage payment on a new loan.  Therefore, you are going to have to bring in someone else to qualify and sign on the new loan.

Richard Maryanski & Erik Maryanski
Rich Dad Education Elite Trainers

Real Estate Financing

Real Estate Financing

Observations on Real Estate Financing

Here are some current observations on financing in today’s real estate market.  Since the economy is up and inventory is down, the prices are up in several markets.

I have noticed from information that I have gathered from students in the Creative Real Estate Financing class and from mentoring students, as well as from banks that we have talked to while mentoring, that the financing terms for real estate are finally loosening up.  Depending on the markets that you are in, here are some observations on financing for Owner and non-Owner occupied single family homes.

  1. The owner occupied LTV was 80%, now it is up to 90 and 95% in some cases.
  2. Banks are taking a 90% 1st and a 5% 2nd.
  3. We have not seen 2nds since 2007.
  4. FHA is still at 96.5% LTV, however, now they allowing the co-borrow to come in on the loan if you have a poor credit score or debt coverage ratio.
  5. Debt coverage ratio on Owner occupied was 30-45%. Now it is up to 50% ratio.
  6. For investment property on SFD, non-owner occupied max loans were 4. Now some places will allow 10 loans or higher.  This will allow you to buy more investment properties.

Jumbo loans were $417,000. In some places, it is as high as $728,000. Up until recently, jumbo loans required 20% down or higher.  Some lenders are offering 10% down and offering 5% interest only.  Again, we have not seen these types of loans since 2006.  This is a great time to be purchasing Single Family properties, with interest rates at 60 year lows and property appreciation increasing.  This is also an excellent time for a great ROI on properties.  Talk to several lenders, credit unions, and banks to see what kind of financing you can get for your project.

Richard Maryanski
Rich Dad Education Elite Trainer

The Quest for Financial Freedom – Application

Rich Dad Education Financial Freedom Success

Financial Freedom: Application

It is not uncommon for a person to have a moment of pause when they finally have to apply what they have been taught.  Even a person with a strong desire to achieve financial freedom, who took those initial first steps fearlessly, can become a little nervous when it finally comes time to become a practitioner of what they have been studying. An individual might have mastered the curriculum of a specific subject, yet still have doubts in their ability to apply what they have learned.  These nerves, fears, and doubts are all understandable, yet at some point if you are to obtain financial freedom, you are going to have to put them aside. A journey of a thousand miles may begin with a single step, but it is not completed without many more. The application of what you have been taught is how you complete this journey.

In the early stages of application, you likely will be a little rough around the edges as you gain valuable experience. Your first trade will not go as smoothly as your 100th trade. In your first home inspection, you might underestimate the amount for repairs. In making your first lease-option pitch, you might stumble through your presentation. Unfortunately, it is unlikely that perfection awaits you on your first attempt in your chosen area of investing. Yet, as you start to apply what you have learned, your confidence will begin to rise as your mistakes start to diminish.

While the mistakes made through the natural learning curve diminish, there still will be obstacles, setbacks, and pitfalls. For Robert Kiyosaki, how you handle these disappointments that occur will go a long way to measure “the size of your success.”  Unfortunately, there simply is no way around these disappointments. Ultimately, how these situations are handled is what separates those that achieve financial freedom and those that do not.  Those that persevere, and continually apply what they have been taught, come that much closer to achieving financial freedom.

Not every trade you make as a stock trader will be a winner. You will not have 100% of your offers accepted on houses, nor will 100% of your negotiations be successful.  During times where little seems to be going right, you may be tempted to quit. For some, the temptation will become reality as they stop their journey. They believe they are ill equipped to handle the emotions that accompany the disappointments that arise during their quest for financial freedom. Financial freedom requires not only desire, dreams, hard work, and sacrifice but also demonstrating perseverance as well.  For Rich Dad Education students that are able to demonstrate all of these qualities, the escape of the Rat Race is at hand and financial freedom will be within their grasp.

For those within Rich Dad Education and Rich Dad Education students, financial freedom is not an abstract concept.  Financial freedom is the objective that each person seeks to obtain. It is the moment where we have truly gained control of our own lives. To reach that moment takes strong desire, perseverance, sacrifice, hard work, study, and constantly taking step after step. There is a price to pay for this freedom but the rewards make the price look small by comparison.

The Quest for Financial Freedom – Study Habits

Rich Dad Education Financial Freedom

Financial Freedom: Study Habits

Rich Dad Education students who have a strong desire to achieve financial freedom usually have little problem finding the motivation to taking the first step towards obtaining that freedom.  This first step typically comes in the form of attending Rich Dad Education elite trainings, taking advantage of Rich Dad Education mentoring services, or utilizing other Rich Dad Education educational offerings. These educational programs are focused in entrepreneurial areas such as real estate investing and stock market trading, and are designed to teach students practical and relevant strategies that can lead to financial freedom.

Once a student selects an area that they feel passionate about, an area that they believe can help them obtain financial freedom, then the educational process begins. Rich Dad Education students have widely varying formal education backgrounds. Some have advanced degrees while others do not have high school diplomas. All are on equal footing as they learn from a curriculum that has been ignored by the formal education system, yet used by many to achieve financial freedom.

Regardless of one’s educational background, for most Rich Dad Education students it has been years, if not decades, since the last time they sat in a classroom. Naturally, this might make one’s study habits a little rusty. It is important to shake off the rust as, no matter what educational path you take, you have terminology to learn, concepts to grasp, and strategies to master. Here are a few tips to maximize your learning experience during and after your Rich Dad Education educational offering.

During a Training or Mentoring Session:

  1. Take notes – As we age, our memory is simply not as crisp as it once was. A fact that seems straightforward at the time of hearing it, might be increasingly hazy in the later days and weeks.
  2. Ask questions – If a concept or strategy is not clear at the time of delivery, you are going to have an even harder time at a later date trying to figure it out. Many real estate and stock market strategies require learning numerous new terms and concepts. There is absolutely no shame in asking questions for clarity and understanding. If the trainer or mentor asks you if you understand, do not nod your head unless you truly do.
  3. Maximize Your Time – Many Rich Dad Education offerings occur over multiple days. Some events occur over a period of weeks. Whatever the time interval, it is important to maximize your studying time in the time intervals between sessions. If you are attending a multi-day elite training, then use the time at night to ensure that you understand the material covered. If new terminology was introduced, then make sure you understand the meaning of each term. It is very easy to get lost in conversation if you don’t understand the language being spoken!

After a Training or Mentoring Session:

Block out daily study time – At a Rich Dad Education elite training or mentoring session, you will be provided with a tremendous amount of material. It is very important for you to make sure you retain this material in the coming days, weeks, and months. To ensure this occurs, it is important that you set aside time each day to review and study the material just taught to you. Determine within your own schedule what times work best for you. Not only will this time help you retain this valuable information but will also keep you energized and motivated towards reaching your end goal of achieving financial freedom

Achieving financial freedom takes hard work and sacrifice and even a little good old-fashioned studying.  As you become more familiar and comfortable with the strategies and concepts that you are taught, then you will gain increasing confidence in the application of what you have learned. After all, achieving financial freedom is not achieved through academic exercises. It can only be achieved through the application of what you have learned and overcoming obstacles that occur during this application. This is the subject of the next article in this Rich Dad Education series.

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