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How To Line Up Funding For Your Commercial Real Estate Deals

We talked briefly, if you watch prior videos, about residential lending and some of the basic mortgage programs. This is commercial lending. This is typically if you see on the screen, typically five units or more. Residential lending is a single family, two family, three, a triple decker or are four units.

Commercial lending tends to be five units or more. It can be something that’s less than five units if it’s held in a special purpose entity like an LLC. If you own the property individually and it’s under five units, it’s typically residential property or residential mortgage broker or a lender could help you. If it is five units or more or held in a special purpose entity like an LLC, then it is commercial lending.

Typically what you find with commercial lending it is performance based. When you’re dealing with residential lending you’re dealing with your credit score. You’re dealing with your debt to income ratio and you’re dealing with loan to value and a couple of other factors that affect you personally.

When you’re dealing with commercial lending, it’s more lenders are making the decision based on the performance of the property. When I say performance of the property I mean what rents are coming into the property? What is the rent roll for the property? What is the total gross rents that the property collects versus the total expenses or outlay of cash needed to operate the property on a monthly basis, on an annual basis?

Typically what commercial lenders like to see is what’s called a debt coverage ratio of let’s say 1 1/4 or 1.25 which means, I’ll give you the simplest example. If you have debt on the property or a mortgage on the property and that mortgage is about $1000 per month, most lenders like to see at least 1250 in income coming in or a 1.25 debt coverage ratio. They also want to see that the property is cash flowing on a regular basis. They want to see that you can sustain the property over a long period of time and that it is going to be successful for you. Again, it has less to do with your credit score and your personal debts. More to do with the property’s performance over time.

What else can we talk about commercial lending? Rates tend to be a little bit higher than residential lending. Typically a half a point I would say from my experience. You’re seeing a half a point, maybe a point more depending on the risk that the lender assumes with the property. Commercial lending can be recourse and nonrecourse as well. Nonrecourse loans means that you do not need to give a personal guaranty. If the property for some reason does not perform, and the note is not paid, you will not be personally liable for that. When you’re talking about residential mortgages, if you do not pay you get foreclosed on and that foreclosure goes onto your credit report there’s a ding there when you go to purchase another property.

If you are relatively new to the commercial lending space, most lenders probably will want you to give a personal guaranty to the LLC or the entity holding the property. Once you have a little bit more experience, or you hit a certain loan volume, a certain loan number, typically a million dollars you can usually look for a nonrecourse loans where you are not personally liable for that entity or the performance of that property if the property does not perform to expectations.

Last but not least, you are typically going to find LTV between 75 and 85% so loan to value ratios between 75 and 85%. Which means unlike residential lending where you can put as little as 0% down with a VA loan or a 3 1/2% down with FHA and 3% down with mass housing, most commercial lenders are going to want to see at least 15-25% what they call a skin in the game. They want you to have some equity into the property right off the top. That equity can be the equity pulled together by partners. You can have several owners of one LLC pulling funds together to make that down payment of 15-25%. That’s a lot of times what you see especially with properties of a million or two or three million dollars where it is unlikely that one individual has the capital or even if they do, wants to risk the capital themselves. You find that a lot of individuals tend to pool money together with two, three or more partners form that LLC to meet that down payment requirement.

That’s commercial lending in a nutshell. If you would like more information on commercial lending, or would like to be connected with some of our commercial lending contacts, please click the link in the description below and fill out the quick form. Tell us a little bit about yourself and we can connect you with one of our contacts, one of our lenders that we do business with.

Financing

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Never Pay Capital Gains Taxes On Your Investment Property Sale

What a 1031 exchange is, it basically is a tax vehicle that allows you to trade up to larger properties. Let’s say for instance you have a three family and you have some equity and you’re thinking about selling. If you sold that three family you are going to get hit with a capital gains tax, or you’re going to hit for capital gains taxes on the sale of that property.

If the value of the property went up, if you’ve obviously been taking a depreciation allowance every years so your basis is down, the federal and state government are going to say, “You received capital gains from this investment and you are going to get taxed on the sale. To avoid capital gains taxes and to use that money or the portion of tax that the federal government would have taken, to enhance your portfolio it makes a lot more sense to avoid those taxes and use that extra cash to grow your wealth and put it into the next property.

What a 1031 allows you to do is to avoid capital gains taxes, long as you’re following the IRS rules and you are trading up or using the proceeds of that sale to fund your next property. It’s typically used to trade up for a larger property. Let’s give you an example, I sold a $600,000 property and I bought it initially at, let’s say $400,000, I paid the debt down to three, and I was probably going to have a capital gain of let’s say around $200,000 on that property, if not a little bit more.

If I get hit with a capital gains tax and then use the proceeds to invest, I have less money to invest. A smarter, easier way would be to, not easier way but a more intelligent way, would be to use a 1031. Be within the law use a 1031 exchange to trade up to a larger property. Basically what you have to do is you have to use a 1031 exchange company and you have to follow certain guidelines to avoid that capital gains taxes. You have, I believe, identify a property within 60 days and close on that property within 90 days.

Those laws are changing depending on what administration is in, and where we are in housing and how the housing market is doing. Those are the type of things that you want to make sure, using a qualified company, because as those laws move and the rules change, you want to make sure that you are within compliance so you do not get audited or get hit with tax after the exchange

Make sure you’re following the time tables and identifying your property and purchasing and securing the property within a solid period of time. That’s what a 1031 exchange is. That’s how you can use it. Some of the best and the brightest real estate investors in the business are using 1031 exchanges over and over and over again to trade up to larger and larger properties and keep their money moving. They’re constantly keeping their money moving.

For more information about 1031 exchanges or to be connected with a 1031 exchange company, please click the link below in the description, tell us a little bit more about yourself and what you’re looking for. We can certainly connect you with some of the companies that we use on a regular basis. Thanks, hopefully this was helpful.

Financing

 

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How To Purchase Your 1st Home or Investment Property W/ Little Cash Out Of Pocket

 Just wanted to go over some basic mortgage programs with you today, some mortgage programs every home buyer should understand, understand that’s available to them so they completely understand their options. Some things, some of these you may have heard of, some of these you may not have. Let’s start right at the top. I think the most common throughout the country is our FHA or Federal Housing Administration loan program.

It allows for a minimum of 3.5% down. You’re looking at about $3,500 down for every $100,000 you spend. That’s the easiest way to look at it. It allows for a credit score as low as 580. If you’re in the 600s or 700s, you’re in great shape, but you can purchase a home with a credit score as low as 580. Some of the benefits of having a 600+ credit score is the rates start to become a little bit better for you, the mortgage interest rate becomes a little bit better for you. Mass Housing. Here in Massachusetts, in Boston, you can also purchase a home with 3% down. Mass Housing does require you to go through a firs time home buyer’s program where FHA’s does not. Mass Housing does have a few income restrictions. You can only make so much money before you are no longer qualified to use the Mass Housing program.

Again, 3% down so about $3,000 for every $100,000 you spend on your home. $300,000 home, roughly $9,000 down payment. Conventional mortgages. If I can backup just a second, one of the downsides to the FHA program is there is a fee that you pay for using such a low down payment program. It’s called primary mortgage insurance. It’s something that you pay for the use of this program. It’s a fee that you pay every month, roughly. It can range from $100 to $400 a month depending on the size of your mortgage. In some cases, it may make a lot of sense for you to forego the FHA and put a little bit more down, go 5% down. You can do a conventional mortgage program with 5% down; owner-occupied conventional program with 5% down. As long as you plan to occupy the residence you can usually get in.

The rates may be a little bit higher than the FHA or Mass Housing, but again, if you were making a little bit too much money for the Mass Housing and you don’t like the idea of the PMI or primary mortgage insurance on the FHA, conventional may be the way to go. Again, your rates can be a little bit higher, but the total mortgage itself may be a little bit lower after you reduce or pull out the primary mortgage insurance payment. Conventional, you can also go conventional and purchase an investment property. Investment property, you would probably need 20% to 25% down depending on which mortgage lender you received.

Conventional programs go anywhere from a 5% owner-occupant to a 25% investment property. The VA loan programs. If you are a veteran, and I believe if you are a family member of a veteran, you can also use the VA program which requires nothing down at closing. You can actually purchase a home with zero down for your veteran status. You really want to check the VA housing website. I would google, I don’t know what the exact URL is, but I would google Veterans Administration Housing Loan Programs or Mortgage programs. I’m pretty sure the website would pop right up. There’s a great opportunity for you, yourself, a family member, or if someone of your friends is a veteran, definitely inform them about this program.

Last but not least is your 203K. A 203K allows you to buy property that needs a little work. You purchase a property, looking at a property, and let’s say you’re going FHA. You look at that property and if there is a missing stove, if there is peeling paint, if there are holes in the wall, FHA is not going to approve that loan. They want the house to be move-in ready, immediately ready to occupy. 203K steps in and says, “This house is right on the verge of being a good property but it needs a little work. It needs a new kitchen. It needs a new bathroom. It needs paint. It might need a roof.” The 203K allows you to purchase the property and also get rehab funds at the same time.

Let’s say, for instance, you’re purchasing a property at $200,000. The purchase price will be lent to you and then additional $30,000 to fix up your kitchen, your bathroom, and some other things that are needed to be done. You really want to, if you’re going to go through 203K program, you want to make sure that your lender has experience with the 203K loan. You do have to get a contractor involved. That contractor would need to submit bids to make sure that the money is being appropriated correctly. There’s a lot more involvement when they’re going to be giving you rehab funds as well.

FHA, Mass Housing, conventional, VA, and the 203K loan are your basic mortgage program.

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