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Financing - Secured Loans

Unless your rich uncle gives you a building, you are probably going to have to finance it. On this page we will go into finding a loan for your building. The first building I bought, I financed it with a SBA (Small Business Administration) loan.

The advantage of SBA loans, is they normally require less money down when buying a building. When I bought my first commercial building, I only had to put down 5% to purchase the real estate. The other nice thing about a SBA loan, is they wrapped into the loan amount, any finish out I needed to do. So in my situation, I was purchasing the building for $460,000, then I wanted another $150,000 for finish out - to build the bathrooms, walls, updating the AC, build offices, etc. So those two are added together and the total amount of money would be $610,000. On top of the actual loan amount, there are a few costs wrapped into the loan, like closing costs, filing fees, appraisals, etc. So that takes it to about $625,000 in my case. Since it's a 5% down, I needed 5% of $625,000 or $31,250 cash at closing to buy the real estate.

But at closing, they only have to give the seller the $460,000 (minus what ever part of the fees that would come out of their part). The remaining money is kept in an account that I can draw from while doing the finish out of the property. And these draws needed to be in minimum $25,000 installments. So you get the contractor to start building walls, AC guys, etc, then when you've got invoices for $25,000 or more - you turn them in to the banker, and they cut a check to the general contractor that pays those invoices.

Now this is really a secured loan. They have a lien on your building. If you don't make payments - they come foreclose and take away your building from you. That's what a secured loan is. The building is their security that you will make the payments. But the nice thing about the SBA loan that I did - is I had smaller payments in the beginning.

When undertaking a construction project like this - there are Construction Loans. With a construction loan, you put down the initial money for the down payment, and your remaining money for the construction is held in escrow and taken out as you make draws from the escrow account. At this point, you are not 100% sure what the final cost will be. Perhaps you'll decide to take out the extra room you planned, or you find an AC unit can be repaired instead of replaced. That means you will spend less than you need on the project. During this period, you make interest payments on the amount of money that is already out - but you are not making payments on money you have not spent yet.

There are normally terms of say, 6 months, at which time, or sooner if you finish your project earlier, then the loan gets re-figured on the amount of money you have actually used, and the loan gets transferred into a standard loan instead of a construction loan.

Now normally, SBA loans will be Prime + loans - floating. That means that the interest rate of the loan will be the Prime Rate + maybe 1% or so, and it will float with the change in the Prime rate. The interest rate of your loan can change every quarter based on the closing rate of the prime rate. That means your payments may go up or down - so don't cut yourself too tight.

It's important to note here that you are not making the loan directly with the SBA. You are going through a bank that makes SBA loans. Many lendors specialize in SBA loans, and some don't touch them. With a little research you can find out if your present bank does SBA loans, or find a lender that does on line.

Because rates took a dip, I took the opportunity to refinance my loan as a conventional loan which I could Fix the interest rate for 5 years. I tried to time the market fluctuations out and grabbed a pretty low interest rate - in the low 5% range, and it's amortized over 20 with a 5 year fix, then it switches to just a few point over Libor so that netted me out a interest rate presently of less than 3%.

In my situation, when I went to go do the first building, I had checked out loans before I ever looked at buildings. There are many loan sources, either local banks, or on line, and I checked out a lot of their web pages to learn what were the going interest rates, what would my payments be if I spent $500,000 or $750,000 etc.

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After looking at a lot of the web sites on the loans - and they will vary in rates and closing costs - I picked one and went to go see what I could get approved for, so I knew what range I could hunt a building for. Obviously, the better credit you have, the better your interest rates, and the more money they will lend.








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