Thank you for the kind words.
In your area, try Fifth Third Bank and see what they will need to finance a deal as you have outlined.
A track record of successful deals will help bolster your credibility as a serious investor.
Let’s go back to the financing question for your proposed deal. Here is how the commercial loan officer will look at it.
First, the loan officer will want to see the operating expense details for the proposed property and a current rent roll. For the vacancy allowance, the loan officer will use either 5% or 10% depending upon your local market conditions. I have been told that Columbus is experiencing a soft rental market, so expect to use a 10% vacancy allowance.
Rental income at 100% occupancy will be computed from the current rent roll. Proforma (or projected rents) that are above the current rents will be rejected in favor of current actuals.
A 10% management expense will also be added to your operating costs. Don’t forget property taxes, hazard and liability insurance, cleaning and maintenance costs, grounds maintenance, trash removal, advertising, legal and leasing fees, utilities not paid by the tenants, and some reserve for replacements.
All your ownership and operating costs will be subtracted from your scheduled income minus an adjustment for vacancy allowance. The result will be your Net Operating Income (NOI).
Your NOI will be divided by 1.3 to determine your maximum permitted debt service. Once you have your debt service (monthly payment), use your financial calculator to plug in your interest rate and a 15 year loan term to calculate your maximum loan amount. If this loan amount is less than 80% of your proposed purchase price, then you will have to bring more down payment money to the settlement table. If this amount is greater than 80% of your purchase price, then your maximum loan amount will be reduced to 80% of your purchase price.
Lastly, the lender will inspect the property before approving any loan to insure that the property fits the lender’s property standards.
If you have followed this description of the process the commercial loan officer will use to “back into” the maximum allowable loan for your proposed purchase, I hope you see that the lender might not even approve 80% financing if your operating income is insufficient to support the debt service.
FYI, even though your loan is amortized over 15 years, the loan will be reviewed every five years. If the property still has strong financials, the lender will likely extend your loan for another five years. If the financials show signs of weakness (costs increasing faster than rents, declining NOI, higher vacancy rate, etc), the lender may call your note with a balloon payment due in 30 days.
By the way, here is another tidbit (though unrelated to your situation) I picked up from a commercial loan officer in the largest independent regional bank in my area. I was asking for a $1MM credit line. I have a long track record of success, a high net worth, and ample gross income from my rental properties. Because I have done such a good job at sheltering my income and paying little to zero income taxes, that was counted as a negative. The more income taxes I pay, the more money I might be allowed to get in a credit line. This loan officer also told me that his bank does not like to make “speculative” loans and does not freely give a real estate credit line. A much smaller regional bank has given me their maximum real estate credit line for the past three years based upon my track record, my credit score and my financial statement. The point of this story is that you just have to shop around.