In commercial lending, it is important to understand and know how to evaluate the income of a commercial property.  Today I am going to go over some basics on evaluating income on a commercial property.

There are two basic foundations for evaluating a commercial properties income.  You have contract rent and market rent.  Contract rent is the portion of gross income from the rent as outlined in the lease or rental agreement.  This is the actual rent collected.  Market rent is the reasonable rent you can expect if the property is available at the time of evaluation.  This is what would be paid on the open real estate market, and is based on current rents for comparable space.  This projection should be substantiated by an appraiser and/or rent surveys for the property.

When putting together a pro-forma or project statement, the rent for the vacant space is determined by using the market rent for each unoccupied space.  You will use the contract rent for the occupied space.  If your contract rent is lower than market rents, this could hinder the value of your commercial property.

Effective gross income (EGI) is the anticipated income from the property after taking into account a vacancy factor, collection loss and rental collections.  Net operating income (NOI) is the anticipated net income remaining after all operating expenses are deducted from the EGI, not including debt service, depreciation and any income tax concessions.  The NOI is an important number, and you should feel comfortable calculating this.

To calculate the NOI, you need to determine the total operating expenses (OE).  There are all of the expenses and replacement allowances from an operating expense estimate.  Again, you do not include the mortgage debt service in these operating expenses.  Typically, you have fixed expenses and variable expenses to take into account to find the total operating expenses.

Fixed expenses are operating expenses that to not vary regardless of occupancy.  Real estate taxes and insurance are examples of fixed expenses.  Variable expenses are expenses that vary depending on the occupancy.  These expenses can vary from year to year, and include management fees, leasing fees, utilities, payroll, cleaning, maintenance, repair and security, to name a few.  Many times, a replacement reserve is also included in your operating expenses.

Once you have your NOI calculated, you can then look at the debt service of the new loan.  This is easily calculated based on the rate and term being offered.  By subtracting the debt service from the NOI, you come up with a number that is called the pretax cash flow (PTCF).  Divide this by 12, and you have the monthly pretax cash flow of the property.

One final calculation that you will want to be familiar with is the Debt Coverage Ratio (DCR).  Typically most banks want this to be at least 1.15-1.25.  The lower the DCR, the higher the risk of the loan.  To find the DCR, take the NOI and divide it by the annual debt service (ADS).  ADS is basically your loan payments for 12 months.  A DCR of 1.25 means that the income of the property is 25% more than the debt service.  This makes the loan less risky in case the income varies.  With a 1.25 DCR, your income can vary, and you can still make your mortgage payments since there is a cushion there already.

Check back in, I will be looking at commercial lending in more detail in the coming weeks.  If you have commercial lending needs, I am always here to help, please email me or call 877 462 3422 today to discuss your scenario.

A reverse mortgage is a loan that you can take out on your home and not have to make payments on for as long as you live in the home.  These loans are for older borrowers (you must be 62 or older), and are very good options for retired individuals as you do not need income to qualify.

With a reverse mortgage, you are loaned a percentage of the value of your home.  This is determined through a formula that takes into account your age and the value of your home.  You can take this loan as a single lump sum, as monthly payments or as a credit line, making it available to you as you need it.

Regardless of the funding option you choose, the loan does not have to be repaid until you die or move.  With no monthly payments to make, you are not in danger of losing your home should your income fail.  In addition, the cash that a reverse mortgage gives you access to allows you the flexibility to live the lifestyle you choose.

If you are a homeowner on a fixed income, or just don’t want to have to worry about making your mortgage payment each month, it is well worth your while to look into a reverse mortgage.  Feel free to contact me for more information.

30 year fixed mortgages have been extremely popular these days.  With the rates near historic lows, and the negativity towards adjustable loans and the subprime mess, they sure make a lot of sense.  There is another option that has not been getting a lot of press lately, and could be a very good option for many homeowners to look into, however.

This new program goes by a number of names, most common is the home ownership accelerator program.  It basically turns your home loan into a checking account, like a line of credit in a manner, but with much better potential from an interest rate standpoint and with a great ability to pay down your principal balance in a unique manner.  It works by applying your assets, income and receivables against the principal balance of your loan.

The quick overview of this program is simple.  You take out a new loan, just as you would any other home loan.  This new loan is set up almost like a revolving line of credit.  You run your checking account, and your income via direct deposit through this line of credit.  Just like a normal checking account, you get a check book and ATM card.  The benefit comes from the balance you keep in checking.  The balance of your checking account in this program offsets the loan amount you are paying interest on, as does the income from your direct deposit.  Even if you direct deposit your paycheck on the first of the month, and then write a check on the fifteenth, you are reducing the principal amount you are paying on for those fifteen days.

Under this plan, your income via direct deposit lowers your monthly balance.  Your lower balance, in turn, saves you interest, and the saved interest becomes an extra principal payment on your loan.  This extra principal payment, in turn, further lowers your balance, saving you more interest.  This cycle continues each month, and compounds your interest savings, allowing you to pay down your mortgage more quickly than you would paying on a 30 year amortized schedule.

This is just a quick overview of the program, please feel free to contact me for more details, or to find out if this program is right for you.

Yesterday I talked about the two major mortgage insurers and their tighter mortgage insurance requirements.  The new requirements could spell an end to much, if not all, of the 100% financing that is currently available.  Today I’m going to talk about mortgage insurance in general, and when it is required.

Mortgage insurance is typically required on any loan that is made at a loan to value greater than 80%.  In the past, borrowers have been able to avoid paying for mortgage insurance by breaking their financing into two parts, an 80% first, and then a second, or line of credit, for the remaining financing they require.  With the new, tighter lending standards, many lenders are not offering seconds at the high loan to values.  Due to this change in lending practices, it has become necessary to take one loan for the full amount rather than two, especially if you are looking for 95% or 100% financing.

Lenders require mortgage insurance to balance out the risk of lending at higher loan to values.  Borrowers pay mortgage insurance every month, and if they end up defaulting or falling behind on their loan payments, the mortgage insurance company comes to the table to make up the difference.  Having mortgage insurance on a loan also makes it more salable on the secondary market.  The more salable your loan, the better terms you are typically able to obtain.

The positive of having mortgage insurance is that you can get a better rate on your loan.  Also, instead of taking a low rate on your first mortgage, and a much higher one on your second, you can have that low rate on all the money you borrow.  If you plan on staying in your home for a period of time, it is beneficial.  Once your home appreciates to the point where you owe 80% or less of the home value, you can petition to get the mortgage insurance removed, keeping the low rate mortgage without needing to refinance.

The negative of having mortgage insurance is that it is an extra expense each month.  Usually, the difference between the higher rate second you would have and the less expensive money of the first balances this expense out.  In the past, you have not been able to write off mortgage insurance like you could interest, but that may be changing, if it has not already.  Talk with your tax professional for information about that.

If you are looking to finance a property over 80%, you should explore both options available to you, a loan with mortgage insurance, and two loans to avoid mortgage insurance.  Get both options so you can compare them side by side and make a proper business decision for your financing needs.  If you would like more information, or if you are looking for a home loan in California and want to know what options are available, please feel free to contact me directly.

100% financing has been getting tougher and tougher to obtain.  With the downturn in the real estate market, and mounting losses for lenders and others, standards have tightened up, and only the most well qualified buyers are able to obtain 100% financing, but it has still been available.  That may not last much longer.

PMI Group and MGIC Investment, two of the largest U.S. mortgage insurers, have announced larger down payment requirements for many markets in the nation.  These are the two largest groups that provide mortgage insurance.  They will no longer provide this insurance on 100% loans, requiring a 5-10% down payment minimum in all areas they deem to be distressed or restricted markets.  You can go here for details on these restricted markets.

In addition to the down payment requirement, both of these companies will be tightening standards on the types of transactions, loans and borrowers they will insure.  They will both require a minimum mid credit score of 620 in order to insure a borrower’s loan.  Additionally, they will both stop insuring negative-amortizing loans and pay-option mortgages.  These changes will have a minimal impact, as borrowers with 620 credit scores or below no longer qualify for 100% financing, and most of the neg-am loans and pay-option loans cap out at a low enough loan to value that mortgage insurance is not required.

Some additional restrictions that MGIC is putting on it’s insurance, however, will have an impact.  MGIC will no longer be insuring cash out refinances.  They will also not insure reduced doc loans, low doc loans or investment property loans.  These restrictions will have an impact if PMI decides to follow suit.

In short, this could well be the end of 100% financing.  If it is not the end, it is certainly going to make any 100% financing very difficult to obtain in the areas they restrict.  Some of the notable areas considered to be distressed or restricted areas include the entire states of California, Nevada, Florida and many of the larger metropolitan areas.

Check back in tomorrow, I will be talking about mortgage insurance, what it is, and why it is required.