Financing: Part 1
I recently sat down with Scott Rosenberg to discuss “financing.”
1. What is the difference between purchasing a property with all cash, and financing?
When you finance, you are taking out a loan from the bank to help you purchase a property. The principle difference is that you’re using someone else’s money to buy something. With time, it should grow in its’ equity, cash flow and yield. While you have to pay an interest rate for the use of that capital, the overall yield for your cash should be exaggerated if the property goes up in value and the rents increase overtime.
2. How do interest rates affect mortgages and the real estate transaction overall?
From a value standpoint, when interest rates are low, the overall cost to borrow dollars is less, which allows banks to make larger loans. This generally means that more buyers will be interested in purchasing real estate, thus it will translate to higher prices overall. Conversely, if interest rates are high, the amount of dollars available to be lent on any particular property will typically be less, relative to the cost of the property. That will generally have a negative effect of the desirability of purchasing real estate, resulting in a lower property value overall.
3. Are there different types of loans used within real estate investments?
Very much so! If we’re talking about two to four unit multifamily properties, they are generally financed using a residential type of loan. Within the commercial sphere, a number of loan products are available for industrial, single tenant, commercial, and apartment properties. The short answer is, yes, there are a multitude of options available out there, and the general parameters for each type differ. But, one of the simple features to commercial loans is that you have a fixed period. Generally speaking, that fixed period is anywhere from three to fifteen years.
5. Does credit history affect loans?
A borrowers’ credit history does factor into the interest rate and amount of dollars a bank is willing to loan to a potential borrower. But, they typically have less influence than they would if you were buying a single-family home.
6 Do banks have to approve of short sale transactions?
Scott Rosenberg is the Managing Director of RE/MAX Results Commercial | RCRE, a commercial brokerage on the Westside which focuses on multi-family investment properties. For additional information please email to firstname.lastname@example.org.