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How do I know which type of commercial mortgage is best for me? |
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There is no simple formula to determine the type of mortgage that is best for you. This choice depends on a number of factors, including your current financial picture and the nautre of your business. DMC Commercial Group can help you evaluate your choices and help you make the most appropriate decision. |
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What does my mortgage payment include? |
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For most commercial loans, the monthly mortgage payments include two separate parts:
Principal: Repayment on the amount borrowed
Interest: Payment to the lender for the amount borrowed
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How much cash will I need for my commercial purchase and/or refinance? |
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The amount of cash that is necessary depends on a number of items. Generally speaking, though, you will need to supply:
Earnest Money: The deposit that is supplied when you make an offer on the house
Down Payment: A percentage of the cost of the property that is due at settlement
Closing Costs: Costs associated with processing paperwork to purchase or refinance a house |
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What is cap rate (capitalization rate)? |
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The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. Put simply, the cap rate is the net operating income divided by the sales price or value of a property expressed as a percentage. Investors, lenders and appraisers use the cap rate to estimate the purchase price for different types of income producing properties. A market cap rate is determined by evaluating the financial data of similar properties which have recently sold in a specific market. It provides a more reliable estimate of value than a market Gross Rent Multiplier since the cap rate calculation utilizes more of a property's financial detail. The GRM calculation only considers a property's selling price and gross rents. The Cap Rate calculation incorporates a property's selling price, gross rents, non rental income, vacancy amount and operating expenses thus providing a more reliable estimate of value.
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What is Debt Coverage Ratio (DCR)? |
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The Debt Coverage Ratio is also known as Debt Service Coverage Ratio or DSCR. The debt coverage ratio or DCR is a widely used benchmark which measures an income producing property's ability to cover the monthly mortgage payments. The DCR is calculated by dividing the net operating income (NOI) by a property's annual debt service. Annual debt service equals the annual total of all interest and principal paid for all loans on a property. A debt coverage ratio of less than 1 indicates that the income generated by a property is insufficient to cover the mortgage payments and operating expenses. For example, a DCR of .9 indicates a negative income. There is only enough income available after paying operating expenses to pay 90% of the annual mortgage payments or debt service. A property with a DCR of 1.25 generates 1.25 times as much annual income as the annual debt service on the property. In this example, the property creates 25%more income (NOI) than is required to cover the annual debt service. |
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What is Gross Rent Multiplier (GRM)? |
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The Gross Rent Multiplier or GRM is a ratio that is used to estimate the value of income producing properties. The GRM provides a rough estimate of value. Only two pieces of financial information are required to calculate the Gross Rent Multiplier for a property, the sales price and the total gross rents possible. If this information is available for multiple recent sales of similar types of income properties in a particular area, it can then be used to estimate the market value of other similar properties in that area. Some investors use a monthly Gross Rent Multiplier and some use a Yearly GRM. The monthly Gross Rent Multiplier is equal to the Sales Price of a property divided by the potential monthly rental income and the Yearly GRM is the Sales Price divided by the yearly potential rental income.
Example 1: If the sales price for a property is $200,000 and the monthly potential rental income for a property is $2,500, the GRM is equal to 80. Monthly potential rental income is equal to the full occupancy monthly rental amount which assumes all available rental units are occupied. Generally speaking, properties in prime locations have higher GRMs than properties in less desirable locations. When comparing similar properties in the same area or location, the lower the GRM, the more profitable the property. This statement assumes that operating expenses are proportionate for the properties being compared. Since the GRM calculation doesn't include operating expenses, this statement might not hold true for similar properties where one of the properties has significantly higher operating expenses. |
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What is the Internal Rate of Return (IRR)? |
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The Internal Rate of Return or IRR calculation put simply measures the average annual yield on an investment. For an income producing property, the internal rate of return or IRR calculation uses the initial amount invested in the property, a series of projected cash flows which are usually after-taxes, and a projected After-Tax Sales Proceeds amount in a given year.
Lets look at an example. If we were calculating the internal rate of return for an income producing property 5 years in the future, we would use the Initial Investment amount or the amount of money put down on the property, the projected After-Tax Cash Flows for each of the five future years and the anticipated After-Tax Sales Proceeds in year five, the final year, to calculate an average annual return on our initial investment amount over the five year period. The On Target real estate model calculates an After-Tax IRR in years 1 through 10 using this method. |
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What is Loan-to-Value ratio (LTV)? |
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The loan-to-value ratio or LTV ratio is calculated by dividing the loan balance of a property by the market value and is expressed as a percentage. For example, a property with a loan balance of $400,000 and a market value of $500,000 has a Loan-to-Value Ratio of 80%.
The Loan-to-Value Ratio can be used to estimate the amount of equity you have in a property. If the LTV ratio for a property is 75%, your equity position in a property is 100 minus 75 or 25%. You can then multiply .25 times the market value to determine the equity amount. |
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What is Net Operating Income (NOI)? |
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Net Operating Income or NOI is equal to a property's yearly gross income less operating expenses. Gross income includes both rental income and other income such as parking fees, laundry and vending receipts, etc. All income associated with a property. Operating expenses are costs incurred during the operation and maintenance of a property. They include repairs and maintenance, insurance, management fees, utilities, supplies, property taxes, etc. The following are not operating expenses: principal and interest, capital expenditures, depreciation, income taxes, and amortization of loan points. Net operating income is calculated like this.
| Income |
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Gross Rents Possible |
100,000 |
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Other Income |
3,000 |
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Potential Gross Income |
103,000 |
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Less vacancy Amount |
2,000 |
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Effective Gross Income |
101,000 |
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Less Operating Expenses |
31,000 |
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Net Operating Income |
70,000 |
Net operating income or NOI is used in two very important real estate ratios. It is an essential ingredient in the Capitalization Rate (Cap Rate) calculation that is used to estimate the value of income producing properties. Lets assume we have a market capitalization rate of 10 for the type of property we are considering purchasing. A market cap rate is calculated by evaluating the financial data from current sales of similar income producing properties in a given market place. We are evaluating a similar income property that is currently for sale with a net operating income of $50,000. |
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What are operating expenses? |
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What is a Pro-Forma? |
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A pro forma analysis is an analytical projection of the potential financial position of a company based on a review of historical information, operating metrics, and potential cost savings due to anticipated changes. Pro forma analysis is typically performed in conjunction with a financial review. A pro forma analysis is one of the main decision-making tools companies use when reviewing potential large-scale company changes, potential purchases, mergers or acquisitions |
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What is needed to apply for an SBA Loan? |
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Typically the following documents are requested:
- Completed application
- SBA Form 413
- SBA Form 912
- 3 years most recent personal federal tax returns
- 3 years most recent business federal tax returns (if applicable)
- Business debt schedule
- Business YTD Profit & Loss Statement & Balance sheet
- Credit report
- Purchase contract
- Resume(s)
- Picture of subject property
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How is an index and margin used in an ARM? |
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An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and a pre-specified margin. The most commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR), and LIBOR swaps. |
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