Income Property Loans
If you are buying a building and you do not own the tenant businesses, you need an income property loan. In this approach a lender looks at the rental income and expenses of the property to see if it generates enough net income to pay the monthly mortgage payment, while leaving a cushion of profit. These loans will generally do not exceed 70-75% of the purchase price.
Lenders will look at these loans like a three legged stool. Your rate and terms will be determined by how solid each of the legs is:
Three Criteria
The Borrower
You will be evaluated on your real estate experience; credit score; available funds for the down payment; and cash reserves to cover vacancy, tenant improvements and leasing commissions. Lenders also like borrowers to have income from other sources to keep their bank accounts growing.
The Property
Every lender has its own standard for what makes a good property. All are concerned about contamination, deferred maintenance, proper zoning and clear title. Some lenders don’t like car washes or ground leases. Some have recently quit lending on office buildings or retail properties. Better properties get better interest rates and terms. Part of our expertise is finding the right lender for each property.
The Income
No matter how wealthy you are, lenders will want to know that the property’s net income by itself will be adequate to pay back the loan. So they carefully consider the length of the leases and the financial strength of the tenants to determine the probability of future income. Most lenders want to see financials on the major tenants in a building. Standard leases require tenants to provide them. Lenders always prefer multi-tenant properties because a tenant vacancy disrupts the property's income far less.
Loans Features
Income property loans come from a wide variety of sources: banks, savings and loans, life insurance companies, conduit lenders, finance companies, pension funds, REITs, private lenders and hard money lenders.
Guarantees. Bank loans generally must be personally guaranteed ("recourse") by borrowers unless the loan drops below 50-60% of value. Conduit and life insurance company loans are usually non-recourse and offer lower rates.
Even when you get a non-recourse loan, a lender will want to see your complete personal financial picture. Sometimes this seems contradictory to a borrower. A lender, however, wants to understand that you are financially strong enough for them to take the gamble on lending without your guarantee. In almost every case, a lender will want to see at least your personal financial statement and probably two to three years of federal tax returns.
Reserves. Institutional loans usually require reserves. This means they will hold money from each month's rental income toward future expenses of the property, such as capital improvements to the building and the impact of vacancies, including tenant improvements, leasing commissions and lack of rental income. These reserves reduce your cash flow, but they give peace of mind that you will have ready funds available for future needs.
Timing. Your escrow instructions should allow at least 45 but preferably 60 days for your financing contingency and at least 15 more days before close of escrow. During the contingency period you have to complete your loan application, obtain an appraisal (3-4 weeks) and environmental report (2-3 weeks), and get a loan committee decision in writing. It is seldom possible in this very active real estate market to speed things up much faster. Make sure you give yourself and your lender enough time!
See further discussion on Understanding Escrows.
Our Services
When selecting an income property loan, you literally have hundreds of alternatives. At Rozelle Financial we work hard to clarify alternatives then simplify the selection process. We listen to your investment strategy and then provide a range of alternatives that best fits your needs. Not only do we help our clients find the best loan, we prepare a loan application package, review lender documents and oversee the escrow process.
