Investor Real Estate Accounts

For real estate investors to keep track of their properties rental performance and tax information in one place.

This blog covers the general topic of real estate markets.

Real Estate Financing

first posted: 2017-06-05 21:25:22.575997

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


image credit: wiki commons

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.

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