Why Finance?

there are two reasons for financing a property

• enabling: make the transaction possible with more limited means
• enhancement: make the transaction more profitable than a cash only purchase

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Common Terms

Best deal are conventional loans

• usually full recourse (depends on state)
• LTV 80% (60% for non resident)
• 30Y fixed 3.7% or ARM (reset after 5Y) 2.9%
• lender may ask borrower to pay "points" upfronts to obtain a lower rate (typically breaking even after 2-3Y)

Commercial loans

• usually non recourse
• LTV 80%
• 30Y amz but with 5Y balloon repayment, typical 5% rate

While 5Y balloon makes sense for the lender who does not want to commit capital over very long periods, it is a problem for the property investor: he needs to have an exit strategy in place by the time the balloon comes up.

Lesson Learned: Beware costs

As a non resident, non US person, my access to US credit is very limited. Most lenders I spoke with were asking me for 7.5% (fixed or ARM, I do not remember) for LTV of 50%-75%.

I found a local bank who proposed at 6.5% and another one 5.5% for 30Y for 60% LTV. The rate is actually ARM+1% floored at 5.5%, so the rate my stay at 5.5% for a while even if rates go up a bit.

The costs however were very high and hit me without warning at closing like a parthian shot: they ended up at 6% (though some of my properties had a title problem which caused 1% extra expense due to legal cost and).

If I keep the properties only 3Y, this will rise loan cost by 2% a year to 7.5%. If I keep it for 30 years, then yes, this raises rates by only 0.2%.

You should be very careful in including closing costs in your simulations. Some lenders use attorney's whose fees are especially high.