Show me the money...

Greetings all and welcome to Real Estate Secrets where we talk about everything involved with flipping and renting properties. I’m you’re host Linda Harley and today’s topic is… commercial loans vs residential loans.

Rocky went back up on the market today…. Woohoo!!!

Hopefully we’ll get some offers by next week!! It’s a beauty and I can’t see it staying on the market for too long.

But since I don’t know how long it’s going to take to sell it, I need to start looking at alternative exit strategies.

The most obvious one is to rent the property and refinance it so that I can get cash out and start on the next project.

So I’m in the midst of running my numbers to see if this is even a viable option.

One of the factors in my decision will be to get a loan or a mortgage against the property.

My agent referred me to a very lovely local banker who we will call Stephanie.

Stephanie works solely with commercial loans, but she was helpful to teach me some basics. Typically by the time an investor gets to Stephanie they already have 5-6 properties and mortgages against those properties.

Even though you can technically have up to 10 conventional loans against your name banks rarely go above 5 or 6, that when you need to go for a commercial loan.

Today we’re going to look at the pros and cons of each.

Conventional loan.

The pros:

• 10% down

• Fixed interest rate that will not change

• 30 years to pay off the loan

• Low interest rate around 1.5%

• You can refinance the property after 1 year and possibly get even better interest rates.

The cons:

• You cannot take it out in a business name, it needs to be in your personal name so you’re on the hook for the money.

Commercial loan

The pros:

• More secure because you can hold it in an LLC which is then held by the S-corp. This protects you as an individual to some extent.

The cons:

• 20% down - so higher than conventional

• Varying interest rates. The interest rate is only guaranteed for the first 3-5 years, then it balloons and it is reset.

• 25 years to pay off the loan, so a shorter loan period and thus a higher monthly payment

• Higher interest rates of 4.99%

• No refinancing. They do not do cash out loans. Meaning that if you improved the value of the building by rehabbing it, you can not have loan against the improved value.

This is why new real estate investors like myself who are getting into the business end up going with conventional loans, simply because the rates are way better and this reduces your risk tremendously.

That’s it for today. If you found this information useful, leave me a comment below to let me know what type of loan you prefer.

Too da loo

Linda