Which is the better 2 mil bank loan?

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XM16E1
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Joined: Tue Oct 22, 2019 9:34 pm

Which is the better 2 mil bank loan?

Post by XM16E1 »

I am purchasing a large commercial building for investment. First venture of this scale. Price is 2.8 million.

Bank 1 has offered 3.65 APR 365/360 calculated interest rate. 10 year fixed APR, 20 year term. Apr adjusts ro 5 year treasury + 3% after 10 years. No prepayment penalty unless refinanced. 800k down required. 1/2% loan fee.

Bank 2 has offered 4.25 APR 365/365 calculated rate. 10 year fixed APR, 20 year term. Apr adjusts to prime + 1/2% at 10 years. No prepayment penalty and can be refinanced without penalty. 20% down required (560k). 1/4% loan fee.

I have approx 1 mil cash in savings I don't need at the moment. Investment portfolio significantly larger, other assets squared away, etc. Income 1.5 mil annually.

Over the next two years I would invest 1.5 million into the building and move my business into it. This 1.5 mil investment into the building would create a very profitable attraction. So the 560k vs 800k down seems a bit more appealing. But I'm considering over the long run tanking 4.25 vs 3.65.

What does bogleheads think?
sc9182
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Joined: Wed Aug 17, 2016 7:43 pm

Re: Which is the better 2 mil bank loan?

Post by sc9182 »

If you have large portfolio (Brokerage) $4-$5 million or higher in this case - May be use your cash, and Margin loan (can be obtained with approx 1% rate — SOFR rate plus some 1% over it).

Since you are using margin for investing purposes- should be deductible too (follow guidelines/rules)

Then start paying off margin fast — your payment will be lot lesser and interest owed will save you a ton. Just saying ..
Topic Author
XM16E1
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Joined: Tue Oct 22, 2019 9:34 pm

Re: Which is the better 2 mil bank loan?

Post by XM16E1 »

I hadn't considered using a margin loan and at this time probably don't have enough time left in the deal to get it all figured out...
sc9182
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Re: Which is the better 2 mil bank loan?

Post by sc9182 »

If you intend to ReFi (with or without margin), 2nd loan sounds better.

If you intend to ride the loan (good bit of 10-year fixed term), bank#1 sounds better. ** since you can payoff (not ReFi) without penalty- May be you can pay it off with Margin/cash; then do a good cash-out ReFi at possibly better terms (if Margin/payoff is not your thing..)
HomeStretch
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Re: Which is the better 2 mil bank loan?

Post by HomeStretch »

Is the property/building the loan collateral or are you required to pledge personal assets / give a personal guarantee?

Better to keep business and personal assets segregated. As you intend to use the building for your business, you may not want to use a margin loan against personal assets for a business holding unless you have to or are using personal assets to guarantee the loan.
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8foot7
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Re: Which is the better 2 mil bank loan?

Post by 8foot7 »

HomeStretch wrote: Fri Dec 10, 2021 8:05 am Is the property/building the loan collateral or are you required to pledge personal assets / give a personal guarantee?

Better to keep business and personal assets segregated. As you intend to use the building for your business, you may not want to use a margin loan against personal assets for a business holding unless you have to or are using personal assets to guarantee the loan.
This. The better loan is the one without a PG. But most of these commercial loans don't require a PG and are underwritten on the building's income potential itself.

Assuming neither require a PG, thenBank 2 pencils out better imo; less capital tied up, refinance opportunities open up, lower upfront fee. The savings of the lower rate on loan 1 mostly wash away for the first few years if you consider probable investment arbitrage + savings from refinance (no fee) + higher upfront fee.
SubPar
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Re: Which is the better 2 mil bank loan?

Post by SubPar »

What's the PPP and does it change based on when you refi (i.e., a refi in year 9 is cheaper than a refi in year 2, etc.)?
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