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Investment Real Estate lending is not as difficult as it seems. Like all Investment Property lending, everything turns on the numbers.
The biggest hurdle in analyzing the project, is the investment income stream.
The seller is going to approach it one way and the lender will analyze it another.
The mortgages below, are specialty loans, generally used for short term financing, or for repositioning financing on single home or building project.
In addition to the basic investment loan, there are others:
The seller wants to use all of the income the property generates, either actual, or anticipated income.
As far as a vacancy factor, he wants to use actual if it’s favorable to him.
The lender on the other hand, wants to use a percentage of the income for expenses, and for vacancy.
The vacancy factor rate is calculated by the following formula:
Take the # of units presently vacant, in the project, * 100, then divide that result by the total number of units. The vacancy rate, plus the occupancy rate will equal 100%
Most underwriters will use their own vacancy factor, depending on the age and location of the building. The higher the vacancy factor, the lower the final value of the property will be.
The Federal Reserve Board has a vacancy rate factor. Generally about 7%, but that figure doesn’t really represent what a specific investment property vacancy factor will be.
A place to start is to begin with what the actual vacancy factor is, for your property, and use that figure, or 10%, whichever is higher.
Other sources are, Real Estate Agents and Associations that can use the local Listings to determine guesstimate about your property.
Property management companies are also a good source of this type of data. They may be willing to give you lots of information, just for the asking.
Local Government Agencies also have this kind of data. Try them.
The value of the project, as determined by the lender, is what the mortgage amounts will be based on. You can pay more for the property, but you do it with your own cash.
The appraisal is very very important on a commercial real estate building or apartment building. The expenses of the appraisal are high, and there may be other inspections needed as well.
If the project is not in good repair, the repair cost will have to be accounted for somehow. Repairs may even have to be made by the seller prior to the closing.
It’s best to submit your own photos of the buildings, and the entire project, right from the beginning. Take the pictures you think the appraiser would take, including the street scene.
If there are glaring problems, the appraiser’s gonna find them anyway, so it’s best to take pictures of those items as well.
Therefore, the lender goes into it with an idea, that you are truthful, for starters, and that you’re willing to disclose the negatives.
If your loan will be turned down because of property condition, it’s better to do it early on, before you spend any money.
Similar to the Vacancy Factor calculation theories, there will be a Property Maintenance Expense calculation. This will be based on the owner’s operating income and expense documents.
It easily understood that if the maintenance costs are low, that could be because the needed maintenance was deferred, and will pop up later in the ownership of the property.
As a new buyer, you want to know what will need to be done, right away, to get the property up to par. Items like new roofs, will be expensive.
A quick approach to determining how much net income to base the value of the property on, would be to use 60% of the gross income, as the base figure to determine the value of the property.
That means, of course, that 40% is the total costs of all expenses. That is just a staring place, and the funding lender will let you know how they calculated the value of the property.
I hope some of this information was helpful. Please just contact me if you need a worksheet, or some other information I may have.