let’s talk : COMMERCIAL LOANS
Last week we talked commitment letters– this week let’s chat about THE COMMERCIAL LOAN BEHIND IT. As you all are probably aware of by now, we have been working to acquire properties out in the Greater Binghamton Area for quite some time. And while we STILL HAVE NOT CLOSED ON THEM (trust me SO many lessons learned to discuss with you all once we close), we DID finally secure a blanket loan in the name of our LLC. It’s been a long process – I want to share with you what I have learned!
So, as we do, let’s talk Real Estate, let’s talk COMMERCIAL LOANS…
Last week I talked about how we signed a commitment letter for a blanket mortgage / commercial loan that will encompass three different properties and sit under an LLC.
WHY DID WE OBTAIN A COMMERCIAL LOAN vs. CONVENTIONAL MORTGAGE?
Residential mortgages are lent to individuals not businesses. We wanted to obtain our loan in the name of the LLC.
WHY NOT JUST PUT THE LOAN IN YOUR PERSONAL NAMES?
While it would have been nice to take advantage of the lower interest rate, lower fees, and longer amort schedules that typically come with a residential mortgage, it did not really make sense for us.
Well we are three unrelated parties investing as a joint group – which honestly can make things complicated enough right there. On top of that, we have been working to operate as a “business”, putting everything we can under the same operating umbrella. I know you probably read that sentence and thought “that’s dumb – diversify your exposure” and trust me we are considering that and will be taking that approach as we expand. Furthermore, we prefer safety on all fronts (for our tenants and for ourselves) and wanted to protect our assets as much as we can. So, then some of you may ask…
WHY NOT JUST PURCHASE THE HOUSE IN YOUR PERSONAL NAMES, OBTAIN A MORTGAGE IN YOUR PERSONAL NAMES, AND THEN QUITCLAIM THE HOUSE TO THE LLC?
BECAUSE I AM A GOODY TWO SHOES AND FOLLOW THE RULES. No, but seriously I am, and while SO MANY investors do this and it works for them, this is technically “mortgage fraud”. As the daughter of an attorney, it is just not something I am willing to take part in. We are working to build a business for the long term, and are NOT looking to “cheat” the system. So, on that note, we all voted to play by the rules and seek out a commercial loan!
For those of you who finance your investments in your personal name and quitclaim your properties to your LLC – I am NOT hating on you AT ALL– it’s just not for me – and honestly, you will probably see better returns than I will because of that, so hats off to you!
MOVING ON – I MENTIONED THIS COMEMRCIAL LOAN WAS ALSO A BLANKET LOAN – WHAT IS THAT?
“A blanket mortgage is a financial product used to fund the purchase of two or more pieces of property. It is a common option used to fund commercial purchases.”
HOW IS THE LOAN STRUCTURED?
25% down (a lot, but doable)
5.75% interest (essentially prime +1 – OKAY this works)
15 year amortization (this was the big OUCH factor at the end that I was not anticipating)
No pre-payment penalty
WHAT DID WE HAVE TO PROVIDE TO THE BANK?
A LOT of documentation
Personal financial statements (if you are curious as to what goes into a PFS check out our post about it HERE )
A copy of each LLC member’s driver’s license
3 years’ worth of tax returns for each member of the LLC
Historical LLC tax returns
Filing receipt for the LLC
Title for each property
Purchase contract for each property
Leases attached to each property
Insurance information for each property
Tax information for each property
Overall, for this one loan, I believe we submitted 30+ documents just to initiate the underwriting process
PROS TO FINANCING IN THE NAME OF YOUR LLC
– You can legally keep your house under your LLC
– The loan is to your LLC not to YOU personally
– Does not affect your personal debt to income ratio (although a PG is technically a contingent liability that banks can inquire about if you are looking to them for financing of any sort)
CONS TO FINANCING IN THE NAME OF YOUR LLC
-Higher interest rate
-Higher closing costs
-Shorter amortization schedule which makes for higher monthly payments
-Longer closing period (based on our expereince)
(1) Contact LOTS of banks – when we decided to work with our specific lender we were under the impression it was hard to find banks who would lend to LLCs – turns out that is not the case! Which leads me to my next point…
(2) Get several quotes – we had to accept a 15 year amortization schedule for now, which is NOT GREAT for cash flow purposes – there are lenders out there who will do a 30 year amortization schedule on a 7-15 year term (luckily, these properties cash flow enough to cover a 15 year amort schedule)
(3) Work to obtain financing ASAP – we have been working on this particular deal since the end of March and still have not closed
I will tell you more specifics as soon as we close! Fingers crossed it is soon! While this has been a long, drawn out, semi-discouraging process we have learned SO MUCH by just going out, taking action and “trying” to make these deals happen. From my own personal expereince, you can read books all day long but you will never really know how things work until you go out and make them happen.
I hope you all find this helpful. I am trying to keep it as REAL as possible and in line with what we are doing on a weekly basis.
What do YOU all think of financing your properties via commercial loans? Do YOU finance your deals in your personal name? What types of financing products are YOU using?
Feel free to comment on the blog post HERE and let us know what YOU think!’
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ME! – this week’s post is based on my personal experience and findings