I am trying to purchase a potentially excellent property that is considered "mixed-use". 3/5 of the property is commercial art gallery space (2 units) and the remaining 2/5 is residential space (2 units). I would like to live in one of the residential units (as a primary residence) and continue to rent the remainder of the property as-is. Unfortunatley, despite the great commercial and rental revenue, I have not been able to find a lender who will finance the loan for less than 20% down because of the property's mixed-use nature. I know few lenders, and my real estate agent only deals with residential sales, so he knows of no lenders who can help me in this situation either. So far my search for a lender who will allow 10% down has been futile. Am I wrong to think that there is a bank out there who would be willing to finance this loan at a reasonable interest rate? If anyone has any advice about this situation, I would REALLY appreciate it.

Thanks!
-jamil

jamil:

You have three options:

1- The preferred would be to get the seller to kick in with 10% financing in the form of a second mortgage.

2- Go with a non-bank lender that is willing to lend 90% {in one facility or by breaking the request into two}. You can safely assume a higher rate with this request.

3- Get an equity partner willing to add an additional 10% down payment to the deal.

Thanks for your response! I have 2 more questions:

QUESTION 1: I am currently having my realtor ask the seller if seller-financing for 10% of the property would be possible. So if in fact the seller will finance 10% of the sale, and I provide the other 10%, will a bank providing the 1st trust have any complications with this situation -- ie: will there be any additional hoops I have to jump through to get this to work simply because I will be obtaining my 2nd trust through the seller as opposed to a bank?

QUESTION 2: Also, I have been reading through your very helpful articles and now question how good of an investment this property really will be. Can you help me determine if a loan on this property is even going to be possible? Here is the breakdown:

4 unit property (3000 sq ft gallery space (2 units) and 2000 sq ft residential (2 units)). Sales price: 1.6Million, Taxes: 15k/yr, Rental Income: 124,800/yr (increasing by 2.5%/yr). These numbers are based on the current setup though, and I plan to make one of the rental units my primary residence, so I will lose out on 1,600x12= $19,200 of revenue. Is this going to be a decent investment? I tried to do the debt service coverage ratio but I am not sure if I should use the Real Estate Taxes in that calculation or not (In an example I saw that you had, you did not include them). Assuming a 5/1 Interest-Only ARM, and NO taxes included in the calculation I got 1.37, but WITH taxes, I got 1.17. You stated in your article that 1.20 was the minimum a bank would allow. The property is in probably the best neighborhood (or one of) in my city, and located on a premier art gallery location, and my wife has always drempt of living in a property like this, so there are many intangibles that also factor into this decision -- but considering strictly investment potential, is this a good move? How do I account for my own living space? If it helps, my annual income is 103k and my wifes is 66k.

One last thing, the facade of the house has not been donated, so if I were able to secure this property, I would also get a $1.6Million tax break. Does the bank take that into consideration?

If this loan is possible and you know of any lenders who could do it, please send them my way!

Thanks!
-jamil

[B][/B]

”….will there be any additional hoops I have to jump through to get this to work simply because I will be obtaining my 2nd trust through the seller as opposed to a bank?…” In reference to your question #1, the Bank should not have a problem with the deal as long as it cash flows enough to pay both loans. There might be a few that would feel more comfortable seeing you put in more of your own money and these might balk, but the mere fact of getting a second will not mean a rejection. Also I hope that you are in the US, because we call them mortgages over here not trusts, and if you are not then I am probably giving you completely inadequate feedback


”….Can you help me determine if a loan on this property is even going to be possible? Here is the breakdown: …” The loan is possible mostly because of the nice personal income that you bring to the table, by looking at the numbers that you gave me the property is overpriced as an income producing property. I very much doubt that a valuation based on the income approach will come up with a $1.6MM price. The only factor that could possibly affect this valuation so much would be how you could use this tax break that you are talking about.

Did you use the spreadsheet that I have linked in http://www.loanuniverse.com/sensitivity.html ?Please use it and input all of the numbers related to the operation of the building. Not just taxes, but utilities and maintenance at a minimum. Look at the Net Operating Income and multiply that 12.5 {that would assume an 8% Cap Rate} The minimum Cap rate to use if you are looking at something as an investment. I suspect that your building is coming in at less than 6%.

”….If this loan is possible and you know of any lenders who could do it, please send them my way! : …” I am sure someone will introduce himself or herself. I do not recommend people, and I don’t charge. The fact that you have good outside income makes this possible, but like I said before I do not like the numbers.

By the way, the building does sound very nice. Living on top of galleries should be pretty cool as the landlord you get all the wine you could drink and cheese you could eat every week

Good luck

PS: Also forget about an interest only deal. You probably want to look at this with a 25 year amortization for both loans.

Thanks for the great advice, I appreciate you taking the time to answer my questions -- I truly respect your answers. By the way, I am in the US -- for some reason my real estate agent calls 1st and 2nd mortgages "trusts" and I guess I have started to emulate that lingo.

Thanks again for your help!

-jamil

As you have probably read by now....a seller second (2nd mortgage from seller) is in order. A bank will never hold a second mortgage on the real estate snce they will never settle for a 2nd lien position (unless they get to put liens on your other properties).

OK, so the owner will hold the 10% second mortgage for me!

The problem is that due to the mixed-use nature of the home, the only lender I can find is one which will do the 80% first mortgage at 7.25% with 1.75 points (5 yr interest only). Is this reasonable? Something in the mid-low 6's with 0 points seems reasonable given the fact that although it is 1/2 commercial, I am going to use the property as my primary residence. Am I wrong in thinking 7.25% is really high?

Are there any lenders out there who can do this loan on better terms? If so, please respond quickly, time is of the essence.

Thanks.

I do not know all of the particulars of your financial condition. I want to say that the loan seems a tad on the high side specially the fees, but rates and fees are usually higher in the non-bank lenders.

I have not seen a fee higher than 1% in the last two years or higher than 1.5% in the last five. But then again, we do not do interest only loans for five years.