A great deal of money can be saved by structuring the right loan terms on your real estate transaction. It is the opportunity cost of making the right decision where the money is saved.
When choosing the right real estate loan terms, it’s not all about the lowest interest rate. It’s wise not to fall into the trap of merely looking for the loan with the lowest interest rate. Many other elements come into play when structuring the right loan terms that affect the transaction’s profitability.
Factors to consider and questions to ask in determining the right loan structure for your specific deal:
1. Property Ownership Objectives:
- How long do you plan to own the property?
- Are there partners involved who need to be compensated?
- Are there capital improvements to be made to achieve stabilized occupancy?
- Is the property at a stage where it is producing maximum cash flow?
- Is the property owner-occupied or an investment property?
2. Interest Rate Options:
- Is the interest rate fixed or variable?
- Are there options for both?
- Is it a rising or falling interest rate environment?
3. Type of Loan Payment Calculation:
- Interest-only, amortized, or a combination?
- Is there an option for interest-only then amortization?
- How long is the amortization?
- Are reserves and/or impounds required?
4. Prepayment Penalty Options:
- Is there a prepayment penalty and if so what type?
- Is the prepayment penalty a step down, flat fee or a yield maintenance?
5. Loan Term:
- What are the loan term options?
- Is there a balloon payment?
- Is the loan term fully amortized?
- Is the loan assumable?
6. Desired Leverage Amount
- If a refinance is it a straight refinance, cash-out, or both?
- What is the debt service coverage constraint?
- What is the Loan to value constraint?
- If it’s a construction loan, what is the loan to cost constraint? And how is the land value considered in the calculation?
I have experienced so many different scenarios over the years where the loan structure made all the difference between a successful investment and a bad investment.
One example: a client who needed a permanent loan coming out of a construction loan with multiple partners who needed to recoup some of their investment in the refinance. They wanted cash-out at close, wanted maximum cash flow from the start, lowest fixed interest rate, no prepayment penalty, highest loan amount, longest term, and planned to sell the property within a few years.
The client’s complex needs made it a challenge to get the loan structure they wanted to maximize the profitability of the investment. However, there is always a way to get the deal done.
There is give and take on different factors to accomplish your main objective. In this case, we had to give up a little on the interest rate to get no prepayment penalty and structure the loan with partial interest-only payments for maximum initial cash flow with a more conservative LTV ratio to get cash out.
The most crucial factor that will drive how you best structure the loan terms is first to identify your property objectives. Once that is determined, you can pinpoint the other key elements needed, so the appropriate lender can be found to accommodate your goals.
All these factors play a role in how best to structure your real estate loan. Making the right decision can make all the difference in maximizing the profitability of your investment.
Finding the right lender is the key, and having an experienced mortgage broker as a consultant can help you navigate this process to your advantage.
If you are looking for someone who is not only a direct real estate bridge lender but an experienced mortgage broker with extensive lender connections, we can help you at Fidelis.