'Financing Investment Property'

Investment property is different that other investments. An investor buys property to make money off the property not to conduct his business in the property. Three types of commercial buyers; 1. A buyer will use property in same manner as seller, to make money in the property (10% of sales) 2. A buyer will modify property to fit his needs, to make money in the property (15% of sales) 3. A buyer will buy property for investment, to make money from property (75% of sales) How much can be borrowed on the first mortgage of the property? It depends on: 1. type of property 2. location of property 3. credit and net worth of buyer 4. management/ownership experience of buyer or their management company 5. selling price of property 6. lender’s appraised value of property 7. lending practices of mortgage source 8. lender’s money supply A good rule of thumb is 80% if property is well-located, well-constructed, well-managed. First Mortgages percentage ranges: Apartments 70 to 85% Store blocks 60 to 70% Office buildings 70 to 85% Shopping Centers 70 to 85% AAA1 net-net leased buildings 80 to 90% Variables Adjustments: 1.Location: excellent location – indicated aboveAverage location – deduct 5 to 10%Poor location – deduct 10 to 20% (if you can even get a loan) 2. Credit and net worth of buyer: lender will look primarily to the property. If the property cash flows the lender is more inclined to grant the mortgage, but if the buyer’s credit and net worth are questionable the lender will have a problem. 3. The Selling Price: the lender will look primarily to its own appraisal for the fair market value of the property. 4. The Lender’s Appraisal of the Property: Supply the lender a brochure that includes; a. Accurate operating statement and rent roll b. Good photo of property. c. Signed net worth statement of buyer d. Completed loan application on bank’s form e. Cover letter explaining why you believe this will be a good loan for lender. The major obstacle in selling investment property is the down payment. How can the Seller help to close a sale? Secondary Financing! Generally an owner can expect to receive a higher price for his property by offering to take back a second mortgage on a personally singed note by a qualified buyer. Seller Benefits: 1. Usually obtain higher price for his property. 2. Can sometimes defer paying part of his capital gains tax until he actually receives his cash. 3. Can usually sell property in a shorter time, because more potential buyers are available with the lower cash down payment requirement. 4. He may receive a higher rate of return of interest than he would if he deposited the funds in a money market, bonds or equities. Buyer Benefits: 1. He can acquire more property. 2. He can experience economic growth on a larger parcel. 3. He can conserve his cash for physical improvements to the property. How the Purchase-Money Mortgage is written The PMM term is generally 5-years, but they can be shorter or longer depending on the seller’s priorities. The payments are a constant payment of interest and declining principal. The PMM involves a balloon payment (unpaid loan balance) at the end of the term. The PMM loan is amortized over 20 to 30 years but paid off in 5-years. This keeps the loan payment smaller to the buyer and allows the property to cash flow. The PPM leaves a balloon payment to be refinanced by the buyer when the PMM note comes due. Types of PMM 1. Interest only—with a balloon. 2. Interest on the declining balance, principal constant, with a balloon. 3. Interest and principal on the declining balance—self-liquidating. 4. Interest and principal on a constant direct reduction basis—self liquidating. 5. Interest on a constant payment basis with a balloon. MOST COMMON Balloon MortgagesDoes the buyer have to put up new funds to pay for the balloon when it comes due? Not if the term of the PPM is long enough. The solution to the problem is to write the second mortgage for a long enough term, so the buyer can consolidate his financing by refinancing his first mortgage with the present lender or a new lender.

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