The Encyclopedia of Commercial Real Estate Advice

ENCYCLOPEDIA TOPIC HFinancing

Adjustable/Floating Rate Commercial Mortgage: Sometimes it is better to have an adjustable rate

We are taught that a fixed rate is better than a floating rate. But sometimes it is a better choice to choose the floating rate. If you are buying a commercial property and intend on fixing and flipping it, an adjustable rate that is close to a point lower than a longer-term fixed rate can be the way to go. Adjustable rate mortgages almost never have prepayment penalties, so you do not have to wait for one to expire to sell the property. Also, some lenders will give you an option to fix a floating rate when the timing is good for you. Many commercial loans start out with a fixed rate and then convert to an adjustable rate. Most community banks will fix the rate for a period of 3–5 years and then the interest rate will adjust one or two times over a 10-year term. Many regional banks offer mortgages that have a fixed rate for up to 10 years and an adjustable rate for the next 15–20 years. Construction and bridge loans are usually adjustable rate, interest-only mortgages with an interest rate that adjusts monthly.

Appraisal (Three Approaches to Commercial Appraisals): The income approach in a commercial appraisal is king for most lenders

Three Commercial Appraisal Approaches

1. Income Capitalization Approach: I am listing this approach first because it is the gold standard for lenders. This approach uses the capitalization rate (or cap rate as it is better ...