Understanding Commercial Mortgages

Welcome to the world of commercial mortgages. This booklet is written to the individual who is venturing out into the world of commercial investment. It is written to introduce you to some of the differences between residential loans and commercial loans and hopefully help you to be more profitable in your quest for diversifying your income through commercial properties. I will endeavor to teach you the who, what, and why of commercial loans. A big part of your success as a commercial investor is in choosing the right mortgage for the property so it just makes sense to learn about commercial mortgages. What follows is the straight scoop on commercial mortgages. Knowledge is power; my goal is to give you that knowledge-accurate knowledge. And so, let’s begin.WHO?Who lends the money in the commercial realm? This is the first and possibly most important difference between commercial and residential. Yes, you apply to a large lender or bank or some financial institution whenever you do a residential loan. But the money is not really lent by that institution. It is for a few days. But ultimately they sell the loan to FNMA or FHLMC and get reimbursed the money. They just keep the servicing rights. Fannie or Freddie then bundle all those loans and pass them through to investors as mortgage backed securities. In other words, the bank is not really lending their own money. It is not that way in commercial. In the commercial realm, most loans are done by banks and it is their own money. They take the money on deposit with them and loan it out to different companies. There is no giant like FNMA waiting to reimburse them. If that loan goes into default the bank is stuck unless they can sell the property for a profit. Because of this, they are much more picky than they would be on residential loans.But that is not all. 80% of all businesses fail within 2 years and if someone does fall into financial difficulty they will let their commercial investment go before the house that their wife and kids live in. Commercial loans are investment loans and you know full well the rules are stricter on investment loans. Because each piece of property is completely different, commercial deals are not hard and fast. No standard qualifying ratios here. The property is more important then the borrower. You can have an excellent borrower but have a bad property and no one will buy the loan. I had a loan officer call me mad as anything that his client’s loan was denied by our underwriter. His message was something like this, “I have a guy with perfect credit, great income, a property worth $450,000 and all he wants is a little cash out loan of $300,000. You must be an idiot if you can not get this loan done.” So I pulled the loan, and much of what he said was true. The borrower’s credit was perfect and his income was good-except on the property. The property itself was losing money. His borrower told him the property was worth $450,000 but based on the cash flow, it would not appraise for more than $150,000 (more on appraisals later). No one is going to loan $300,000 on a place only worth $150,000!In talking to him, it turns out he has been trying to get it approved for over a year! Commercial loans are deal specific. Understand that the bank is loaning their own money and they will be very picky on what they will lend on. The good news is that if the deal is good, there is more than enough commercial money available-banks WANT to lend. They are just more careful when it is their own money.WHAT?What takes commercial deals so much longer than residential loans to close? Rare is the commercial loan that closes in less than 1 month and the rate for those quick-close deals is much higher. Small commercial loans will usually take 2 months and large commercial loans can take as much as 4-6 months or more! Many factors go into this-the appraisal, the broker themselves, the title, and especially the borrower. Let’s start with an appraisal. It will rarely be ordered before the loan is approved and the borrower has committed. This could be weeks into the deal. Once ordered, an appraisal on a commercial property will often take a month and it could be longer if the property is large and has mixed use. That is because the land under the commercial property is just one part of the equation. The properties value ultimately will be determined by its’ cash flow. The appraiser of a commercial property has to get the financials on the property and compare it to similar properties in the area. If my apartment complex is 80% rented and the average complex in the area is 85% rented it will effect my appraisal. How the property has been managed is important. How quickly the appraiser can get that information is important. The appraiser often must contact an owner and get information direct from them. It is not as easy as pulling up an MLS listing. Don’t trust someone who says they can turn a commercial appraisal in less then a week like a residential appraisal. That person does not understand commercial.You must be careful in choosing a broker or banker to help you. A broker often can drag the file because they do not get the information needed up front. If my apartment complex is running 30% vacant compared to most places running 25% vacant then I need to explain that and have a business plan ready that explains how I am going to change that. Most brokers will send a deal in with a residential loan application filled in, a credit report and two years tax returns and think the loan can get approved. Then when asked for the stuff that is really needed-3 years operating statements, business plan for the property, etc. they balk at getting it. The loan will never get approved just based on 2 years tax returns and a credit report. Why? Because the property is the most important factor. If you get the right documents in a timely fashion, however, then your loan will move through much quicker and actually have a chance of getting approved. Because title on commercial property often involves such things as environmental and zoning issues, it can take 30 days as well. One 10 Million dollar deal got hung up on environmental issues for 3 months! The more complete the information up front-the quicker you can close.Finally, the other big drag on commercial closing times is the borrower-and I don’t just mean dragging on getting documentation. It is important to remember time frames, if you are under contract, you have 45 days of underwriting and appraisal time from the time you stop shopping, provide everything, and commit to a lender. You CAN’T SHOP A COMMERCIAL LOAN UNTIL THERE ARE JUST 30 DAYS LEFT! If you do, you will end up with a high rate, quick close loan, or asking for an extension and risking losing the entire property if the seller got another offer. It is not worth losing out on a property that will yield you thousands of dollars of profits in a month over 1/8th percent in rate which may mean $50 a month saved! Don’t be penny wise and pound foolish. Understand the time frames and operate appropriately.WHY?WHY invest in commercial real estate then? If the loan criteria are tougher, and the deals take longer to close-why not just stick with residential investing? Because, commercial properties are much lower maintenance properly managed. You can rent them out triple net lease and have the customers make all the repairs. You are typically dealing with a large building built very well and not a house with kids. These properties are not used like a residential house-people don’t live there and so the life of the property is extended. And even if you are dealing with a multi-family property where people are living, you have diversified revenue. One apartment complex may have 20 units in it and so if one renter moves out you still have 19 other rents coming in. The commercial mortgage is actually your best friend because we take into account vacancy rates when underwriting the file and make sure that the property still cash flows EVEN with average vacancy rates for the area. You KNOW your return on investment going in and the risk is mitigated. PLUS, you get all the normal benefits of investing in Real Estate: appreciation, but you get to depreciate the asset on your returns, steady money with minimal effort, and a hedge against inflation that is tough to beat.Commercial real estate investing can be lucrative. If you are a business owner, buying a property and fixing your payments instead of rents that escalate yearly is a smart move. Either way, commercial real estate is a smart choice. Making the right choice on your mortgage can make all the difference between a good investment and a great investment. I hope this helps clarify commercial mortgages some, for more info or assistance, please feel free to call the representative who sent you this report.Best Regards!

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3 Reasons Why Your Small Home Business Needs Home Based Business Insurance

It’s estimated that more than half of all small businesses in the U.S. are home based businesses. The Census Bureau estimates that there are over 27 million home based businesses as of 2007. This has certainly risen since the down turn in the economy when many people lost their jobs. This shift has given way to the small, home based business of today and tomorrow.As an Independent Insurance Agent I run my business out of my home. The benefits are tremendous and technology allows more efficiency and productivity. I’m able to spend more quality time with my family instead of dead time on a commute to an office. I’m able to react to customer requests more quickly. And, I found out that I’m not alone. I meet so many people who manage their small businesses from their home, it’s fantastic.But, there is a problem. Most of these at-home small businesses don’t have home based business insurance. I find there are three common reasons these entrepreneurs don’t have business insurance. These are also the three reason’s you need a home based business insurance policy.
My Home Insurance Policy will cover me. It’s logical to think, since they own a home, somehow their home insurance company is going to cover any loss they may have. Unfortunately this is not the case. Most home insurance policies have a minimal amount of coverage for Business Property. So, if you have product, equipment, or supplies related to your business, at your home, there will be little or no coverage and, if the product, equipment, or supplies is away from your home then you’ll have even less coverage. Generally, you can increase this coverage through a special endorsement but most insurance companies won’t go higher than $10,000.
Besides limited Business Property coverage, there is minimal coverage for Business Liability under your home hazard insurance policy. Imagine a product you produce injures someone after purchase. Your home policy will not cover this type of liability claim. Or, say the UPS driver is delivering supplies and material and gets injured on your property due to a hazard. Will you have coverage for this loss? No. Are you a Realtor? You may have limited coverage if you’re out showing homes and your buyer is injured or you cause property damage. We live in a risk filled world, with people who are more inclined to sue than not. It’s in your best interest to protect yourself by having the right home based business insurance.
I’ve had my business at home for a long time and nothing has happened so I don’t think I need it. This is a common excuse I hear from many home based business owners. They don’t believe they face any risk. I once went to the home business of a seamstress. She had a room where she did alterations for her clients and she had cats. One of the cats was wearing a diaper because it was marking its territory in the house. What if the cats damaged a wedding dress or a stack of high end jeans waiting to be altered? Just because nothing has happened before doesn’t mean something won’t happen in the future. Give your clients assurance and confidence that you are a legitimate business by have the proper insurance.
Business insurance is expensive and I don’t think I can afford it. This couldn’t be further from the truth. Many home based businesses just need a basic home based business insurance policy. These can run as little as $159 annually depending on the type of business and the amount of coverage you may need. Also, you might be losing business because you don’t have any business insurance. To bid on contracts you usually need to show a Certificate of Insurance proving a minimum level of coverage. Having the right business policy can put significant dollars in your pocket, many times more than the cost of the policy.There you have it. 3 reasons why you need business insurance for your home based business. If you’re in Arizona feel free to call my office to ask any questions. If you’re in any other state, call an Independent Agent in your area for the right advice for your particular situation.

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The Fed moves up its timeline for rate hikes as inflation rises

The Federal Reserve on Wednesday considerably raised its expectations for inflation this year and brought forward the time frame on when it will next raise interest rates.

However, the central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program, though Fed Chairman Jerome Powell acknowledged that officials discussed the issue at the meeting.

“You can think of this meeting that we had as the ‘talking about talking about’ meeting,” Powell said in a phrase that recalled a statement he made a year ago that the Fed wasn’t “thinking about thinking about raising rates.”

As expected, the policymaking Federal Open Market Committee unanimously left its benchmark short-term borrowing rate anchored near zero. But officials indicated that rate hikes could come as soon as 2023, after saying in March that it saw no increases until at least 2024. The so-called dot plot of individual member expectations pointed to two hikes in 2023.

Though the Fed raised its headline inflation expectation to 3.4%, a full percentage point higher than the March projection, the post-meeting statement continued to say that inflation pressures are “transitory.” The raised expectations come amid the biggest rise in consumer prices in about 13 years.

“This is not what the market expected,” said James McCann, deputy chief economist at Aberdeen Standard Investments. “The Fed is now signaling that rates will need to rise sooner and faster, with their forecast suggesting two hikes in 2023. This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary.”

Markets reacted to the Fed news, with stocks falling and government bond yields higher as investors anticipated tighter Fed policy ahead, including the likelihood that the bond purchases will slow as soon as this year.

“If you’re going to get two rate hikes in 2023, you have to start tapering fairly soon to reach that goal,” said Kathy Jones, head of fixed income at Charles Schwab. “It takes maybe 10 months to a year to taper at a moderate pace. Then you’re looking at we need to start tapering maybe later this year, and if the economy continues to run a little bit hot, rate hikes sooner rather than later.”

Even with the raised forecast for this year, the committee still sees inflation trending to its 2% goal over the long run.

“Our expectation is these high inflation readings now will abate,” Powell said at his post-meeting news conference.

Powell also cautioned about reading too much into the dot-plot, saying it is “not a great forecaster of future rate moves. “Lift-off is well into the future,” he said.

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