Lines of Credit. 4 reasons why they might be the right option for you.
Lines of Credit (“LOC’s”) are often used by businesses. Inventory build-up, financing receivables, or funding seasonal requirements call for a ready infusion of cash. Cash perhaps not readily available from regular operations. A LOC is the ideal credit vehicle, to preserve cash flow.
Do they have a place in commercial real estate financing as well?
Absolutely! Here are 4 reasons why they might be the right option for you:
1.Its an excellent source of acquisition funding
A real estate secured LOC provides you with ready access to property acquisition funds. A previous client had a blanket LOC secured against several properties, subsequent in priority to modest 1st mortgage balances. This allowed him to very quickly pull the trigger when he identified a property for purchase. The client put a regular mortgage in place after acquisition, and paid off the LOC. The overall blanket security for the LOC was increased, for the next acquisition. Real Estate Investors run out of money before they run out of opportunities to consider!
2. Its ideal for specific property purposes
A number of years ago an apartment owner approached me to arrange refinancing of existing debt. The borrower required an amount $100K over the maturity balance, earmarked for balcony repairs. After discussions with the borrower, and a review of their cash flow, it was quickly determined that it made no sense to pay for balcony repairs over the 25 year amortization horizon of the mortgage. A LOC for $100K was arranged, secured by the same Charge, and strong cash flow allowed the borrower to repay this portion quickly.
3. Re advancement is possible
An added benefit of securing a LOC, is the ability to go “back to the well”. Subsequent advances of funds are available, and there is no need to re-apply for credit each time. Hence the often used term “revolving”.
4. Repayment is flexible
LOC’s are typically repayable on an interest only floating rate basis, on the amount you’ve borrowed. There are no prepayment penalties or early exit fees, unlike what you might see on a conventional mortgage or term loan.
How do LOC’s differ from term loans?
Borrowers use a term loan once. For acquiring a specific asset. A LOC can be used multiple times.
Borrowers put a term loan in place when needed. However, a LOC is put in place, ideally before its needed.
Term loans are typically amortized over a short period of time, and required blended principal and interest payments. As a consequence monthly payments are typically higher.
In summary then, LOC’s are an excellent addition to the real estate investors tool kit, and they may the right option for you. Borrowers should not finance longer term assets with LOC’s. However they are a very flexible credit alternative. Well suited to starting or growing a real estate portfolio, or funding specific property needs, on a short term basis.