- The larger the compensating balance in the borrower's account, the easier it may be to get a compensating balance loan.
- To set up a compensating balance loan, the borrower should establish a deposit account with the lender where the loan is requested.
- Some lenders may offer a line of credit instead of a regular term loan. Borrowers should consider taking a line of credit, as it can be just as useful as a regular loan.
- Be prepared to describe the method and give the lender an example of the type of loan you have in mind, since the lender might not use the term “compensating balance.”
- It may be easier to get a compensating balance loan from a commercial bank or credit union than from other lenders, so these are good places to start. A list of commercial banks can be obtained from fdic.gov and a list of credit unions from ncua.gov.
- Look to large lenders and lenders with locations in your area.
- Shop around at different lenders. If one turns down your request, move on to the next.
- Keep the lender happy. The borrower should keep the full amount of the compensating balance in the account at all times. It may be helpful to keep more than this amount in the account, if possible.
- For the best chance at obtaining a compensating balance loan, apply for the loan through an existing business, rather than as an individual.
Tuesday, January 28, 2014
TO BORROW MONEY EFFECTIVELY, loan brokers, finders, consultants, and potential borrowers need to understand as many different methods as possible to increase the likelihood that a lender will make a desired loan.
FOR EVERY LOAN REQUEST, the lender weighs many variables, such as type of loan, amount, interest rates, repayment terms, borrower's collateral, job status, earnings, credit score, credit history and other factors. To be an effective loan finder or borrower, you need to know how to use this information to secure the funds you, or your client, need.
THE COMPENSATING BALANCE LOAN
ONE METHOD THAT CAN HELP YOU, OR YOUR CLIENT, get a loan is by using a “compensating balance.” This is an amount of money that a borrower agrees to keep in an account with the lender as a condition for getting the loan. Such loans are most often made to businesses, although they may be provided for real estate as well.
THE ACCOUNT CONTAINING THE COMPENSATING BALANCE usually does not bear interest to the borrower, and the lender is free to use the money as it wants. If the borrower fails to repay the loan as agreed, the bank can take the funds from the account.
A SIMPLE EXAMPLE
COMPENSATING BALANCES ARE TYPICALLY 10%-20% of the amount of the loan.
A SIMPLE EXAMPLE OF THIS METHOD would be where a lender agrees to make a $100,000 loan as long as the borrower keeps a deposit balance of at least $10,000 (10% of the loan) in a savings, checking or certificate of deposit (CD) account. The $10,000 is called the compensating balance.
HOW IT WORKS
IT'S NOT UNCOMMON FOR LENDERS to subtract the interest and the compensating balance amount from the total principal of a compensating balance loan. For example, on a $25,000 loan at 8 percent interest for one year, the interest of $2,000 (8% of the loan) and the compensating balance amount of $2,500 (10%) may be subtracted from the $25,000 principal. Thus, the total amount the borrower receives is $20,500. This is only a general example. Individual lenders and specific loans may vary.
SOME LENDERS PREFER TO OFFER A LINE OF CREDIT rather than a regular loan when a compensating balance is used.
DESCRIBING THE LOAN
THE NAME “COMPENSATING BALANCE” HASN'T CAUGHT ON with all lenders, even though you'll find it in financial texts like the Dictionary of Banking Terms and Dictionary of Business Terms. “Offsetting balance” is another name that is sometimes used.
GENERALLY, LENDERS WILL UNDERSTAND what you're looking for when you describe the method—“an amount of money the borrower agrees to keep in an account as a condition for getting the loan.”
WHEN APPROACHING LENDERS about this kind of loan, be prepared to describe the method and explain the type of arrangement you want. Give an example like the one above if you need to.
AS WITH ANY LOAN, IT'S WISEST TO SHOP AROUND at many different lenders. If one lender turns down a request for a compensating balance loan, the next one might make the loan that you, or your client, need.
TO GET THIS TYPE OF LOAN, YOUR BEST BET is to go to commercial banks or credit unions. A list of commercial banks can be obtained from the Federal Deposit Insurance Corporation (FDIC) at fdic.gov. A list of credit unions can be obtained from the National Credit Union Administration (NCUA) at ncua.gov.
TIPS FOR GETTING A COMPENSATING BALANCE LOAN
IF THE BORROWER CAN MAINTAIN THE AGREED-UPON COMPENSATING BALANCE amount, a compensating balance loan can be a useful tool to help fund a growing business or real estate endeavor.
Wednesday, January 22, 2014
Monday, January 13, 2014
SOME INVESTORS BUYING REAL ESTATE TODAY find that many properties they look at have a Negative Cash Flow (NCF). This means you have to pay out more money than comes in. For example, a multifamily apartment house with a monthly income of $10,000 and expenses of $10,500 has a $500/month NCF.
TO MAKE THIS BUILDING PROFITABLE, you'd have to (a) reduce your monthly expenses by $500 or more, or (b) increase your monthly income by $500 or more. You can do this in multiple ways. Here are 11 actions you can take:
1. Raise the rent for each apartment in your building. Doing so will increase your income, help to pay your expenses, and reduce your NCF to zero. Figure how much you'll have raise each rent to increase your monthly income by $500.
2. Increase the rent for new tenants. It's easier to get a higher rent BEFORE new tenants move in than after.
3. Reduce your monthly mortgage payment by getting the term of your loan extended from 15 years to 25 or 30 years. This will reduce your monthly mortgage payments, lowering your expenses to wipe out your NCF.
4. Negotiate a lower interest rate on the first mortgage to reduce your monthly costs. Thus, reducing the interest rate by 1% on a $300,000 first mortgage will save you $300 per month in interest costs.
5. Convert your first mortgage loan to an interest-only loan. This will again reduce your monthly payment. You'll repay the principal in the form of a "balloon" at the end of the loan term or when you sell the property.
6. Have the real estate taxes reduced or temporarily suspended. Do this by visiting the local tax board and presenting your case to them. Contact your county or city government for help. The worst they can say is no.
7. Reduce your operating expenses by cutting costs. For example, get a part-time manager instead of a full-time one or collect the rents yourself instead of paying a management firm. Look for additional operating expenses you might be able to reduce, such as advertising, cleaning, landscaping, supplies, telephone, trash, etc.
8. Get your tenants to pay for utilities such as heating, water, electric or gas. This will save you big bucks and reduce your NCF.
9. Make two, or more, income units from one. This can nearly double your income from the area occupied by one unit.
10. Consider charging parking fees. These fees are not uncommon nowadays.
11. Increase your security charge from 1 month to 2 or 3 months. This will give you more cash and higher interest earnings on it.
For more real estate tips and methods, visit the International Wealth Success Website.
Thursday, January 09, 2014
IF YOU WANT TO MAKE MONEY BY RENTING—as many people seeking income real estate do—your best bet may be to buy multifamily units such as duplexes. You can live in one part while your tenants pay your mortgage. Or you can rent out both parts of the property and make more money.
BUYING A SINGLE-FAMILY HOUSE may not always be the safest choice. If your rental property sits vacant for a few months, you could lose a lot of money.
HERE ARE 10 THINGS YOU CAN DO to buy income property wisely:
- Think like a business owner or business buyer instead of a home owner or home buyer.
- Find out about the rental market for housing in the area where you're thinking of buying. Inspect the property and inquire with local government offices about laws regarding rental properties in the area.
- Prepare to make improvements on the property. Think ahead. Build the costs and time into your plan. If you don't, getting a unit ready to rent could take much longer and be more costly than you expect.
- Expect to pay more in points and interest for an income property than for a home you live in. Lenders consider a loan on income property to be riskier, so they charge higher interest and/or points.
- Pre-screen tenants carefully. Don't rent to just anyone who'll give you a deposit. You might have potential renters fill out an application. You can check their credit, employment and rental history if you want to.
- Stick by the rules you give your tenants. For example, if you say “No pets,” don't make exceptions. Don't invite trouble by letting tenants ignore rules.
- Choose rental properties that are close to home. Don't spend your profits traveling to manage your property or paying for long-distance repairs.
- Don't be afraid to make a low-ball offer to the seller. Remember, you must think like a business owner.
- Look at “competitors” near the property you're investigating. Do they have lower rents, vacancies or amenities like washers and dryers in the units?
- Insure yourself and your property, not only against fires and hurricanes. You also need to protect yourself against potential law suits from tenants, guests, repair people and other visitors.FOLLOW THE GUIDELINES ABOVE to make smart real estate buying decisions for better rental income.
For more real estate tips and methods, visit the International Wealth Success Official Website.
Click to visit Ty Hicks' International Wealth Success Website at www.iwsmoney.com for more wealthbuilding tips and products