When investing in simple rental homes, long term financing and fixed rates available. Financing multi-family properties may also be accomplished with long term financing, but if one is acquiring a retail, an office or an industrial property, either for use in business, or as an investment, then the terms of the loans which are typically available, may be more complex.

In the case of SBA financing, where one intends to occupy the building to be acquired, financing with loan to value ratios of up to 90% may be obtained if the buyer will use at least 51% of the building for their business. SBA loans will be comprised of a first loan and a second loan, one of which may have an adjustable rate component. When financing investment properties, the lenders become more conservative in several significant ways. Firstly, they will tend to offer 25 year amortization, not 30 year. Secondly, they will often have their loans amortizing at the 25 year rate for a period of 5, 7, or 10 years with the entire balance to be due at the 5, 7,or 10 year mark. This creates a market risk, since it is difficult for an investor to predict what the rates will be when the need to refinance arises. It is prudent to watch market conditions, during the latter stages of the initial period, so that refinancing can be accomplished when the market is favorable, and not in the face of a “bullet”. Thirdly, the use of loan to value ratios as a determinant of a maximum amount to be loaned is an illusion. The lenders actually use a Debt Coverage Ratio to define their limits. Debt Coverage Ratio is Net Operating Income (after expenses) divided by Annual Debt Service. Typically, the lender will want to see that the Net Operating Income represents about 120% of the amount needed to pay the mortgage payments. To further complicate the matter, lenders will often impute a percentage of expenses for a certain building type, without regard to the actual expenses for a building. In effect, this lowers the Net Operating Income.

Please feel free to contact me for information regarding business locations and investment properties.