when borrowing for real estate development, how does one calculate the cost of money?
by Mortgage Rates on Saturday, October 16th, 2010 | 3 Comments
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I would talk with a loan office at several banks or savings and loans. They should be able to give you a good idea of a realistic rate.
The rates you can get will correspond directly to the percieved risk for the lender. Experience, planning, and research are all things that you need to have that will improve your rates. Finding a lender more comfortable with a particular investment type will help as well. Right now you won’t beat 7.5%, so 9% is still pretty good, especially if its your first time!
The investors that like to see 35% on their money are talking about what you expect. This is simply rediculous if you have a solid well thought out managable plan. They think you are a risk and after loaning it to 10 people like you they will make a good rate “on average”. Don’t even bother with lenders like that who are so sophisticated they think they need to become billionaires in 20 years. (2.2 million invested at 35% will make you a billionairre in 20 years)
I am not sure exactly what you mean, your question was a little vague. I will tell you this, estimate high. If you are looking to borrow funds for rehab and development lenders need to know the initial cost of the building, the appraised value of the building, the estimated cost of repair, and the value of the property after rehab. Some may also want to see the expected income from the property. Lenders like to see down payment funds, a real estate investment history, strong credit and collateral just to name some things. Do not count on an investor giving you 100% financing on an investment property with 5+ units. I have yet to see it happen. Also be prepared for your interest rate to be as high as 16%. There are lots of companies you can look into or call for more information about there programs or procedures. Or you may find help with a mortgage broker who has experience with commercial properties. It is best to have an advisor in situations like this as these types of loans can be difficult to do yourself especially if you are not familiar with the financing aspects. A good number of commercial lenders will lend based on the after rehab value. You must know all of your costs coming in and you will need a detailed report of what you plan to do to and with the building. Since I didn’t really understand your question, I hope some of this helps at least.
Good Luck!