lin
Full Version: rental property & commercial loan
Hi, I own a home I live in w/my children and there is a commercial property available that also is a two flat, fully occupied with a very small store front; also occupied. I want to buy this property, how do I do this with the least amount of money down? Total rental income is 1550.00 a month and I want to pay 198K for the property. My house has some limited equity so cash flow is an issue, and I want to make an offer asap. Also, where do I go for the loan where they are flexible?
lin
lin
lin:
Well you are probably not going to like this answer, but it is very possible that this property is a little overpriced at $198,000. I also have some bad news about the terms since a commercial bank would require at a minimum a 20% down payment, and probably 25%. Loans on these types of properties are limited to 75% or 80% loan-to-value on most credit policies. You will probably need to go with another type of lender in order to get the loan. This would almost certainly result on a higher interest rate and fees.
Now let me support my assertion of the property being overvalued. Remember that I am using broad and generic assumptions about the property. It could very well be that there are characteristics that make it unusual and therefore more valuable, which would then warrant a higher price. Some of these could be a larger than usual plot or some zoning that would allow a prospective owner to tear the building down and build a more profitable structure to get the best use.
However, you have to approach this from the point of view of a real estate investor and this means that you have to use the “income approach” valuation. After all, the lender is going to do something very similar to make sure that there is enough money to repay the debt. Using the income approach you get the following numbers.
Potential rental income: $18,600
Minus estimated vacancies: ($930)
Effective Gross Income: $17,670
Minus Operating Expenses: $3,000
Net Operating Income: $14,670
Using a “rule of thumb” capitalization rate of 10% the estimated value of the property would be { NOI / Cap Rate = Estimated Value} or $146,700.
As you can see the price might be a little to high at $198,000. Of course the real valuation can only be done with access to the real numbers. For example, I am assuming operating expenses of $3,000, but they could be lower {very unlikely} or higher {good chance}. The lender will use something similar to the income approach valuation to determine coverage by taking the Net Operating Income and dividing it by the debt service. If the loan that you got for the purchase had annual payment of $12,500 then the Debt Service Coverage Ratio would be {$14,670 / $12,500 = 1.17X}. That would also be under the guidelines for most banks, which require a 1.20X or above DSC.
I should also note that most lenders in a purchase such as this would make the loan based on the lower of purchase price or appraised value. You should also know that appraisals for commercial properties are more expensive than residential properties and this would be an added expense.
If you still like the property and want to make a bid, you can always make the offer subject to financing and an appraised value. This way, your exposure would be limited to the expense of the appraisal. You should consult both a lender and an attorney to make sure that the actual numbers work and that your offer truly limits your liability.
Hope this helps.
Well you are probably not going to like this answer, but it is very possible that this property is a little overpriced at $198,000. I also have some bad news about the terms since a commercial bank would require at a minimum a 20% down payment, and probably 25%. Loans on these types of properties are limited to 75% or 80% loan-to-value on most credit policies. You will probably need to go with another type of lender in order to get the loan. This would almost certainly result on a higher interest rate and fees.
Now let me support my assertion of the property being overvalued. Remember that I am using broad and generic assumptions about the property. It could very well be that there are characteristics that make it unusual and therefore more valuable, which would then warrant a higher price. Some of these could be a larger than usual plot or some zoning that would allow a prospective owner to tear the building down and build a more profitable structure to get the best use.
However, you have to approach this from the point of view of a real estate investor and this means that you have to use the “income approach” valuation. After all, the lender is going to do something very similar to make sure that there is enough money to repay the debt. Using the income approach you get the following numbers.
CODE
Potential rental income: $18,600
Minus estimated vacancies: ($930)
Effective Gross Income: $17,670
Minus Operating Expenses: $3,000
Net Operating Income: $14,670
Using a “rule of thumb” capitalization rate of 10% the estimated value of the property would be { NOI / Cap Rate = Estimated Value} or $146,700.
As you can see the price might be a little to high at $198,000. Of course the real valuation can only be done with access to the real numbers. For example, I am assuming operating expenses of $3,000, but they could be lower {very unlikely} or higher {good chance}. The lender will use something similar to the income approach valuation to determine coverage by taking the Net Operating Income and dividing it by the debt service. If the loan that you got for the purchase had annual payment of $12,500 then the Debt Service Coverage Ratio would be {$14,670 / $12,500 = 1.17X}. That would also be under the guidelines for most banks, which require a 1.20X or above DSC.
I should also note that most lenders in a purchase such as this would make the loan based on the lower of purchase price or appraised value. You should also know that appraisals for commercial properties are more expensive than residential properties and this would be an added expense.
If you still like the property and want to make a bid, you can always make the offer subject to financing and an appraised value. This way, your exposure would be limited to the expense of the appraisal. You should consult both a lender and an attorney to make sure that the actual numbers work and that your offer truly limits your liability.
Hope this helps.
Thanks, assuming I ultimately do decide to try and get this property, is a home equity loan on my home the best/only way to obtain the 20 or 25% downpayment required? If so, this brings my home to a 125% of it's value with of course a hefty interest rate and then I want to turn around and try to buy this rental/commercial property. The entire property is zoned commercial and has some real potential in a booming area where commercial properties are going for much more. I was going to offer 198K tops, they are asking 249K and I wanted to 
QUOTE
low ball
What is the fastest way to expedite this so as not to loose the property while I am going through the financial process? AS you probably guessed I am really streching to do this.
First: I can not answer the question regarding whether a home equity is the best or only way to get the financing. After all, I am not a financial adviser and I don’t have your personal financial statement and taxes in front of me. This is a question that has to be answered by yourself after looking at all the possible resources that you can tap.
What is the fastest way to expedite this so as not to loose the property while I am going through the financial process?
As long as you know that you are putting both the property and your own house at risk, and that this is a much more speculating type of deal, then you can approach this the following way:
Regarding the best way to expedite the process: Make your offer contingent on both financing and an appraised value equal to the buying price. This will leave you an out in case that you can not get financing later. Make sure that someone knowledgeable with real estate contracts goes over it. If I have anything to add is that it is sometimes best to walk away. If the seller does not agree with the clauses, then you are putting the deposit money at risk.
The way things are normally done is that a purchase contract is entered into, and then the buyer secures financing. In fact, some lenders require a purchase contract as part of the initial documentation.
Good luck
What is the fastest way to expedite this so as not to loose the property while I am going through the financial process?
As long as you know that you are putting both the property and your own house at risk, and that this is a much more speculating type of deal, then you can approach this the following way:
Regarding the best way to expedite the process: Make your offer contingent on both financing and an appraised value equal to the buying price. This will leave you an out in case that you can not get financing later. Make sure that someone knowledgeable with real estate contracts goes over it. If I have anything to add is that it is sometimes best to walk away. If the seller does not agree with the clauses, then you are putting the deposit money at risk.
The way things are normally done is that a purchase contract is entered into, and then the buyer secures financing. In fact, some lenders require a purchase contract as part of the initial documentation.
Good luck
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