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Who here has an Adjustable Rate Mortgage?

By BayArea follow BayArea   2018 Dec 16, 9:45pm 972 views   2 comments   watch   nsfw   quote   share    


1.) why did you go with an ARM?

2.) did you do 5/1, 7/1, 10/1?

3.) how large of a down payment did you put down?

4.) what’s the end game?
1   E-man   ignore (0)   2018 Dec 16, 10:33pm     ↓ dislike (0)   quote   flag        

Hi Bay Area,

To answer your questions:

1) My multifamily partner and I have ARM on all of our apartment buildings. There’s no 30-year fixed on commercial loans.

My Brazilian partner and I have 30-year fixed on our single unit rentals. He was planning on retiring shortly after our acquisitions during the downturn so we knew there was almost no chance for us to refinance so we locked everything with a 30-year fixed. He has retired for almost 5 years now.

2) All of our multifamily loans are 5/1 ARM on a 30-year amortization with no balloon payment. This means the loans become adjustable after 5 years. The reason we didn’t go with a 7/1 or 10/1 was because the delta in rates was too steep at the time of purchase or refinance. We have the option to refinance to lock the rate again at anytime. However, there are prepayment penalties within the first 4 to 5 years if we do that. Rates are between 3.49-4.2% for the loans. They’re at 4.75% now so we’re not in a rush to refinance.

3) On our previous acquisitions, we put 25% down and took a 75% IO loan with a 3-year ballon. Once the asset was stabilized, we did cash out refinance to pull most, if not all, and in some cases more money than our initial investment, out of the deal. The bank’s underwriting is 1.2 DSCR for each deal. What does this mean? Say our building is bringing $10k/mo. 40% is allocated to expenses and vacancy so we should net $6k/mo. $6k divided by $5k/mo of debt service coverage ratio (DSCR) = 1.2, which is the maximum amount the bank would lend. A $5k/mo mortgage payment is equivalent to about $1M loan at 4% interest rate. $1M is the maximum the bank would lend on this building/asset.

4) Real Estate is about control the asset and leverage the bank’s money while having the tenants buying us the building. The end game is having half of the building paid off while leveraging as much as possible on the other half of the holdings. Cash out refinance proceeds is tax-free/deferred. We get to enjoy the equity and cash flow tax-free/deferred while we’re still alive. Then we pass the assets down to the next generation once we’re gone. They get a stepped up in basis where they can sell, if they choose to, and walk away with the money tax-free.

I wish our parents did this for us.
2   Tenpoundbass   ignore (15)   2018 Dec 17, 5:45am     ↓ dislike (0)   quote   flag        

E-man says
My Brazilian partner and I have 30-year fixed on our single unit rentals.

There should be a Federal Property tax on every single family unit over 2.
You could get a waiver if you can show you actually split living between the two residence and don't rent out the second one.
But no waiver on any over the second unit.

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