Loan Amortization, Loan Term, and Balloon Payments in Commercial Real Estate Explained

Loan Amortization, Loan Term, and Balloon Payments in Commercial Real Estate Explained // In commercial real estate investing, commercial real estate loans end up being pretty different than your standard, 30-year fixed rate mortgage on a home or rental property. So, with that said, what's the difference between a loan amortization period and the loan term, and what are you likely to see for each in a commercial real estate deal? And, on top of that, how does a balloon payment fit into this, and how is that calculated (and paid off) once a loan term comes to a close, even if the loan amortization period isn't complete yet?
If you're just breaking into commercial real estate investing and want to brush up on your real estate finance, definitely check out this video.
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[@TrevorS38]

You do a much better job than a lot of other people making videos. In short time hopefully this will be the #1 video when you search these terms. Good content, well done.

[@katejoyce2725]

Perfectly explained! Thank you. I'm a small business consultant and ran into this issue with a client, and it's way outside what I normally deal with. But now I have the info I need to set them up for success

[@georgekazanchyan9251]

Thank you for the explanation! Too many videos on this topic but only a few like yours actually makes sense.

[@ttmthembi]

Man! I can't express how grateful I am for this channel. You know how to break down complex financial concepts, now I have a clear understanding of the relationship between the loan amortization, loan tern and balloon payments. God bless you brother .

[@Marketplacere]

You have no idea how insightful and helpful you have been in my preparation of home buying. Thank you so much for your videos and being so informative!

[@diogerrodriguez1455]

Easy and simple explanation! Thank you!

[@dyrylburnett8473]

Thank you! Very well explained.

[@dariusbaxter3598]

Thanks bro. This video was actually really helpful. I perfectly understand it now.

[@CrzBonKerz21]

Great content and editing! Thank you! I really needed this. It was funny to watch the sun shadow move on the wall behind you.

[@user-lo4pu4nc2v]

thank you for breaking it down

[@calhutson41]

This was good and beneficial. Thank you.

[@zhinan888]

Thank you for the clear explanation

[@sunnisukumar]

Well explained and in a short format.

[@market1019]

Very clear explanation. Please make more videos. I've liked and subscribed.

[@billanderson5165]

Once you have 4 or 5 mortgages the bank won’t lend anymore. How do you refinance your 5th of 6th property at the end of the 5 year term??

[@mikhailtevs9851]

Thanks great video 👍

[@postgradfit3084]

Life saver thanks!

[@MrLonnieThomas]

Man Justin thanks for this video!

[@EdgarBirdsong]

Great video thanks

[@venugiriaPleasanthome]

well explained.

[@LGoromonzi]

Excellent presentation. Keep it going!!!

[@BreakIntoCRE]

Thank you!

[@sirl1364]

Pls do a video on doing amortization on a interest only loan please

[@prime6215]

excited to see someone with concise presentation and direct with information... Was hoping we could get a free download of some of your models to see if they are in fact what we are looking for before subscribing to your service.

[@BreakIntoCRE]

Great to hear you're finding the videos helpful and to the point! Definitely appreciate the feedback. Many of my KZbin videos have downloadable exercise files and mini-models that could give you a good feel of my modeling style. I also offer a 30-day money back guarantee on Break Into CRE Academy, so if it's not the right fit, happy to issue a refund. Thanks for watching!

[@walkwalk6142]

If business go with refinance route, I personally feel it’s the way lender never let you pay off your principle. Because at the beginning you always pay a tons of interested and barely pay for the principle. Once 5 years term reached, you have to refinance and start all over again to pay for the most of the interest. Borrower never get to pay for big trunks of principle like what they would do in residential loan, and lender never worry about run out of premium interests to collect. What a great deal for the commercial lender.

[@michaelroot1313]

Very good point, the banks are genius

[@sachin911055]

After loan term borrower has an option to either repay the outstanding principal or get his loan refinance from a different lender but I am still unable to understand what is the use of 30 year amortization.

[@scolson18]

Great video and thank you for explaining. Is a balloon ever given upfront? For example, a 5 year term with a 50% balloon at the end of the term?

[@TuMelodico]

OMG just what I've been looking for. Thank you so much for the clear and neat explanation you did in this video. Really helpful keep it up

[@BreakIntoCRE]

Great to hear - happy to help!

[@codycasserly8304]

Great video! Quick question... Why would a company opt for this type of loan? They are saving about 2.5 million in upfront cost, but still have to pay ~27.5 mil in just 5 years. If they couldn't afford 30 five years ago, why would they want to front 27.5 five years later?

[@GQDARRIUS007]

I appreciate u bro

[@jakes5530]

Are there CRE loans that do not involve a balloon payment? Like say a 20 year loan and with 20 year amortization for a property between $1-5 million.

[@giuseppedainotti2369]

How do you know you have a balloon payment? And where in the contract shows that balloon payment?

[@sobellbeauty4578]

Can you explain more to me about 5 years term/ 20-25 year amortization loan please? Please...

[@etmchrome]

so essentially this separation of interest payments from the loan term mainly works because of appreciation and the property's NOI increasing over time?

[@jovanzivkovic4085]

You've made this simple to understand for anyone, that's not easy to do. Great video! What formula did you use for your $30mil, 5% interest rate, 3 year am period. Is this an annual interest rate?

[@BreakIntoCRE]

Hey Jovan, great to hear you found this easy to understand! The formula I used was =PMT(0.05/12,36,-30000000,,0), which produces the monthly loan payment of $899K.

[@gabrielasoare6180]

Great video! Few questions: 1. Does the monthly payment shown in your example include both interest & principal? 2. If the monthly payment is $161,066, at the end of the 5year loan term the borrower would have already paid $9,663,960. How did you get to outstanding loan balance of $27.55M? Wouldnt' it be around $20.3M (=$30M-9.6M). Thanks for clarifying!

[@theMr.K]

1. Yes both inerest and principal. 2. that's because 2.5 mil out of 9.6 million was principle and the rest was interest. So the lender made their full interest in that period of time by mostly monthly payments and got full principple by the end of the blloon term.

[@jamesbarrett7936]

how did you calculate that? i'm confused or i'm just stupid

[@jnanashakti6036]

I'm looking at a loan under 200k to buy a building I'd like to keep. It has a Tavern leasee and two apts on the second floor. What's the best path?

[@BreakIntoCRE]

Totally depends on your goals. If you want to maximize cash flow, a longer amortization period will do that. If you want to have the loan fully paid off at the end of your loan term, then matching your amortization and loan term would work well. At the end of the day, it comes down to what a lender is willing to give you, and what your goals are on the project. Good luck!

[@jnanashakti6036]

I for real do not understand the difference of having to pay everything within five years either way you described it. Whether you pay 900k a month for five years or pay 160k for five years then the balance, you still need all the money within five years. Doesn't make sense.

[@BreakIntoCRE]

I think we're saying the same thing here. It's just a matter of when you pay the outstanding balance. $900k per month gives you less (or negative) cash flow, but you'll have a lower outstanding balance at the end of the loan term. $160K per month will give you much higher cash flow, but you'll have a much higher outstanding balance at the end of the loan term. It's really all about when you prefer to make those payments as a borrower.

[@jnanashakti6036]

I'm understanding now. I don't like it, especially for my circumstances, but I understand it. Thanks for the information, too. Very informative.

[@BreakIntoCRE]

@@jnanashakti6036 no problem. Happy to help.

[@dannytran2506]

Would the balloon payment accrue interest over time or is the borrower just worried about paying back the $27.5 million amount?

[@BreakIntoCRE]

Hey Danny, since the balloon payment is a one-time payment at the end of the loan term that pays off the loan balance in full, the $27.5 million amount will be all that's owed to the lender and no additional interest will accrue.

[@dannytran2506]

Break Into CRE Thank you for the clarification!

[@giuseppedainotti2369]

Break Into CRE where do you find the end of the loan term in a contract

[@Mrdisel4life]

I didn't understand anything.

[@freedinner886]

Great video Thanks

[@BreakIntoCRE]

Thanks for watching, Daniel!