Expert: Terrence Cullen - 1/29/2010

Question
QUESTION: Hi,

I am not 100% seasoned in commercial real estate and had some questions regarding the financing.  To make things easy say I am buying a $1,000,000 apartment complex and I have good credit and proof of funds/income.

1. Would I just put down 20% or is financing for commercial harder and require more money down?

2. The interest rate is usually higher than residential? How much more? 1%?

3. What does a 5 year mean?  Does that mean it's due in 5 years or is that the interest only for 5 years?

4. What are the most common type of loans for purchasing commercial investment properties (apartments, retail shops, warehouse))?

Thanks!
Michael


ANSWER: In this market the usual is 25% down, but with no experience banks make ask for more.

The interest rate depends on where you get the money. Banks being the only ones in this market would probably be higher than residential by 100 basis points or 1%.

5 year usual means you have to refi or pay off in 5 years and the amortization is usually 25.

The most common are bank or portfolio loans which are usually 5 year terms. Good Luck TC

---------- FOLLOW-UP ----------

QUESTION: So I would have to repay the full loan in within 5 years or refinance with that same institution?

Also, if I paid it off in 5 years then why would it be amortized for 25 years?  That is the part that confuses me.

Thanks for your help and sorry if my questions are novice!
Michael

Answer
If you had to pay the whole amount off in 5 years, the debt service would cause you to lose money every year-not a good investment. The bank's collateral is the property and a property that doesn't make enough to pay off the debt it carries would be a bad investment. For the most part if they give you a 5/25 they think that the property will be able to get financing after year 5, but is hedging their bets.