Let’s look at 2 properties: property #1 has 8% cap and property #2 with 7.25% cap:

1. The first property is purchased for $3M. The lender provides a $2.1M loan (70% LTV) at 7.25% interest.
2. The second property is also purchased for $3M. The lender provides a $2.1 loan (70% LTV) at 6.25% interest

.......................................Property #1 ($3M, 8% cap)......Property #2 ($3M, 7.25% cap)
Net Operating Income .......$240,000................................$217,500
Loan amount.....................$2,100,000..............................$2,100,000
Down payment..................$900,000.................................$900,000
Loan interest.....................7.25%.....................................6.25%
Annual Interest payment...$152,250.................................$131,250
Income before tax............$87,750...................................$86,250
Investment equity return...9.75%......................................9.58%
Appreciation rate...............1% per year............................3% per year
Appreciation value.............$30,000...................................$90,000
Total return.......................13.08%...................................19.58%

While property #1 offers higher cap rate than property #2, the return of equity for property #2 is almost the same as property #1. This is due lower interest rate of 6.25%. Why does property #2 get lower interest rate? There are many factors that determine the interest rate:

• Loan amount: In residential mortgage if you borrow less money, i.e. a conforming loan, your interest rate will be the lowest. When you borrow more money, i.e. a jumbo or super jumbo loan, your rate will be higher. In commercial mortgage, the reverse is true! If you borrow $200K loan your rate could be 9%. But if you borrow $3M, your rate could be only 5.9%! In a sense, it’s like getting lower price when you buy an item in large volume at Costco.
• Property type: the interest rate for a single tenant night club building will be higher than multi-tenant retail strip because the risk is higher. When the night club building is foreclosed, it’s much harder to sell or rent it compared to the multi-tenant retail strip. The rate for apartment is lower than shopping strip. To the lender, ever
  Fuel for the Small Businesses – Small Business Loans UK
  UK is a country, which has always encouraged entrepreneurship in its people. Entrepreneurship does not imply setting up a large business all of a sudden. Small businesses of today are the building blocks for tomorrow’s large corporations. The lending institutions in the UK appreciate the small entrepreneurs initiative and thus makes available the necessary funds for the start up and various other needs of business. These are referred to as small business loans UK.Small business loans UK were not as easy to receive. Banks and financial institutions were apprehensive of the entrepreneur’s capacity to repay. A small business is often susceptible to early closures, irregular flows of income, and lack of proof of income. This put the small businesses in the category of bad credit borrowers. So the small business owners in the UK had
  urchased for $3M. The lender provides a $2.1 loan (70% LTV) at 6.25% interest

  .......................................Property #1 ($3M, 8% cap)......Property #2 ($3M, 7.25% cap)
  Net Operating Income .......$240,000................................$217,500
  Loan amount.....................$2,100,000..............................$2,100,000
  Down payment..................$900,000.................................$900,000
  Loan interest.....................7.25%.....................................6.25%
  Annual Interest payment...$152,250.................................$131,250
  Income before tax............$87,750...................................$86,250
  Investment equity return...9.75%......................................9.58%
  Appreciation rate...............1% per year............................3% per year
  Appreciation value.............$30,000...................................$90,000
  Total return.......................13.08%...................................19.58%
  
  

  While property #1 offers higher cap rate than property #2, the return of equity for property #2 is almost the same as property #1. This is due lower interest rate of 6.25%. Why does property #2 get lower interest rate? There are many factors that determine the interest rate:

  • Loan amount: In residential mortgage if you borrow less money, i.e. a conforming loan, your interest rate will be the lowest. When you borrow more money, i.e. a jumbo or super jumbo loan, your rate will be higher. In commercial mortgage, the reverse is true! If you borrow $200K loan your rate could be 9%. But if you borrow $3M, your rate could be only 5.9%! In a sense, it’s like getting lower price when you buy an item in large volume at Costco.
  • Property type: the interest rate for a single tenant night club building will be higher than multi-tenant retail strip because the risk is higher. When the night club building is foreclosed, it’s much harder to sell or rent it compared to the multi-tenant retail strip. The rate for apartment is lower than shopping strip. To the lender, eve
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    al Interest payment...$152,250.................................$131,250
    Income before tax............$87,750...................................$86,250
    Investment equity return...9.75%......................................9.58%
    Appreciation rate...............1% per year............................3% per year
    Appreciation value.............$30,000...................................$90,000
    Total return.......................13.08%...................................19.58%
    
    

    While property #1 offers higher cap rate than property #2, the return of equity for property #2 is almost the same as property #1. This is due lower interest rate of 6.25%. Why does property #2 get lower interest rate? There are many factors that determine the interest rate:

    • Loan amount: In residential mortgage if you borrow less money, i.e. a conforming loan, your interest rate will be the lowest. When you borrow more money, i.e. a jumbo or super jumbo loan, your rate will be higher. In commercial mortgage, the reverse is true! If you borrow $200K loan your rate could be 9%. But if you borrow $3M, your rate could be only 5.9%! In a sense, it’s like getting lower price when you buy an item in large volume at Costco.
    • Property type: the interest rate for a single tenant night club building will be higher than multi-tenant retail strip because the risk is higher. When the night club building is foreclosed, it’s much harder to sell or rent it compared to the multi-tenant retail strip. The rate for apartment is lower than shopping strip. To the lender, eve
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      gher cap rate than property #2, the return of equity for property #2 is almost the same as property #1. This is due lower interest rate of 6.25%. Why does property #2 get lower interest rate? There are many factors that determine the interest rate:
      • Loan amount: In residential mortgage if you borrow less money, i.e. a conforming loan, your interest rate will be the lowest. When you borrow more money, i.e. a jumbo or super jumbo loan, your rate will be higher. In commercial mortgage, the reverse is true! If you borrow $200K loan your rate could be 9%. But if you borrow $3M, your rate could be only 5.9%! In a sense, it’s like getting lower price when you buy an item in large volume at Costco.
      • Property type: the interest rate for a single tenant night club building will be higher than multi-tenant retail strip because the risk is higher. When the night club building is foreclosed, it’s much harder to sell or rent it compared to the multi-tenant retail strip. The rate for apartment is lower than shopping strip. To the lender, eve
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        ow $200K loan your rate could be 9%. But if you borrow $3M, your rate could be only 5.9%! In a sense, it’s like getting lower price when you buy an item in large volume at Costco.
      • Property type: the interest rate for a single tenant night club building will be higher than multi-tenant retail strip because the risk is higher. When the night club building is foreclosed, it’s much harder to sell or rent it compared to the multi-tenant retail strip. The rate for apartment is lower than shopping strip. To the lender, everyone needs a roof over their head no matter what so the rate is lower for apartment.
      • Age of the property: loan for newer property will have lower rate than dilapidated one. To the lender the risk factor for older properties is higher so the rate is higher.
      • Area: if the property is located in a growing area like Atlanta metro the rate would be lower than a similar property located in the rural declining area of Arkansas. This is another reason you should study demographic data of the area before you invest in the property.
      • Tenant: single-tenant property with a brand name/national tenant, e.g. Walgreens will get a lower interest than local tenant.
      • Location: the retail center next to Walmart will probably get a lower rate than a retail center shadow anchored by a local furniture store.
      • Your credit history: similarly to residential loan, if you have good credit history, your rate is lower.
      • The lenders you apply the loan with. Each lender has its own rates. There could be significant difference, e.g. over 1%, in the interest rate for the same property. If you apply for a commercial loan yourself, chances are you will pay a higher rate because you apply for the loan at the “wrong” lender. Commercial loans are very different from residential loans. So you should work with someone specialized on commercial loans to shop for the lowest rates.
      • Prepayment flexibility: If you want to have the flexibility to prepay the loan then you will have to pay higher rate. If you agree to keep the loan for the term of the loan, e.g. conduit loan, then the rate could be 1% lower.
      • Soil Contamination Risks: Loan for a shopping center with a gas station will probably has higher interest rate as the gas station has a high risk of oil leak which could contaminate the soil.
      
      
      Commercial properties also appreciate at different rates. When appreciation is factored into the return, even at a conservative 3% rate, property #2 has almost 50% higher return than property #1, 19.58% vs. 13.08%. The following are some of the factors that