Major medical plans are an alternative to what most people consider normal health care insurance. Major medical covers the costs associated with major medical events such as an extended illness, hospitalization, or surgery. It does not cover the cost of going to the doctor or getting a routine prescription. Most people are under the mistaken impression that the only health care insurance worth having is that which they get through an employer. But, that is actually far from the truth. People have been getting health care coverage without insurance since medical professionals went into business millennia ago.Major medical plans are an affordable alternative for many people. For younger people in good health, the extra cost of comprehensive employer health coverage is a financial burden from which they get few benefits. They might go to the doctor once a year for a physical. They might hit the doctor a second time if they get the flu or some other seasonal illness. But, the monthly costs out of their paychecks seem excessive. They are smart enough to realize they need some coverage though. That is where one of these major medical policies fit in.Major medical plans often go hand in hand with discount plans and health care savings accounts. Discount plans offer people costs savings when they go to pay for doctor’s visits or prescription drugs. The health care savings accounts provide coverage for the deductibles and other costs associated with paying for health care yourself. Having all three pieces in place provides the coverage people need without the high costs associated with an employer based health care plan. And it is scalable to what the person is comfortable paying each month. Once you get your health care savings plan up to the right level that you no longer have that expense until you use the contents of that account.Major medical plans are a good choice for people between jobs. Maintaining medical coverage makes sense. But the cost of COBRA is often too high for people to afford. A major medical policy will help cover the costs of any catastrophic event just in case until you can get an employer plan in place at your next job. If you have a chronic medical condition, you need to verify that you will not interfere with the ability to get coverage at your next employer. Take the time to get the information you need and you will reap the benefits.
We are all taught from day one and we all learn the same lesson – when it comes to loans, the lower rate is always better. But that view is too simplistic and for that reason ultimately not accurate in all cases. There is one dividing line in this kind of thinking: Residential vs Commercial.A residential loan made to a borrower for his or her primary residence will always be better with a lower rate. There is no exception assuming matching payment schedules. In this case, the source of repayment is produced independent of the property. A borrower goes to work everyday to make money so they can shell out the monthly payment on their mortgage. The borrower’s income does not change relative to the size, type, or quality of house they buy. This is an instance where a higher or lower rate is given by a bank based on the stability of the borrower’s income not the property’s income. This means that a lower rate will ultimately require a lower monthly payment which is good because a borrower wants to keep as much of their monthly paycheck as possible. In addition, the income stream is generated by a person not a property. A lender will determine the loan amount available to a borrower based on their personal income after allocating the cost of other debt and living expenses. Other factors are considered, but this is the primary qualification consideration.A commercial loan is made for investment purposes – and the determination of the interest rate is based on the bank’s perception of that property’s ability to repay its loan. The source of repayment is going to be the income produced by the property not by the borrower’s personal income. The property produces income through tenants who will rent or lease a given amount of space. Different lenders put different weights of importance on each of these items according to their program’s purpose: rehab project, passive income investment, etc. All lenders will evaluate the risk based on the following criteria: Property:Income Sustainability – How likely is this income to remain stable over the course of the loan? Weekly or daily rents as with an RV Park or Hotel mean more volatility in income than the monthly or yearly rents typically collected on an Apartment or Mobile Home Park.
Value – Are we lending the borrower more than a property is worth? If so, then there is not much to keep a borrower from walking away from the deal if things get tough or if the borrower wants to just pocket the proceeds of the purchase. A borrower with 20% down on an investment is much less likely to default than a borrower with 0% down. This is not just a logical conclusion, but a proven historical fact based on literally trillions of dollars of loans made and decades of tracking their performances. You can learn more about these kinds of stats from research companies such as Boxwood Means.
Economic Life – Will the property still be in working order when the loan is due? If a 10 year loan is made on a property that will need substantial rehab in the next couple of years, a large risk to income is implied.
Economy – Will the subject market continue to support the tenants with work so they can produce enough income to pay their rent? Economies largely relying on one particular company for employment such as a car manufacturer can run into trouble very quickly. Places like Detroit have run into this issue in 2007. This adversely affects the ability of tenants to pay their rent or even the desire to live in the market.Borrower:Borrower Income – Are the borrower’s personal finances upside down? If so, then it doesn’t matter if the property has good cash-flow the borrower may still default because personal finances are a drain on the subject.
Borrower Credit – How has the borrower repaid loans from other creditors in the past? This is still the same as in residential except commercial lenders have historically been more strict in criteria than residential lenders which have sub-prime credit programs.
Borrower Net Worth/Liquidity – Is the borrower putting every last penny into the deal? If the property undergoes a fluctuation in income a borrower should have the ability to make payments while correcting the cash-flow issue or making necessary repairs or rehab.
Experience – If things don’t go as planned does the borrower know what it takes to keep the income flowing? Regardless of property or economic conditions many times an experienced borrower can overcome the obstacle and adapt to ensure the property remains full and income steady. This may involve different marketing methods or aesthetic property changes to attract new tenants.We see that there is much more to consider in the decision of making a commercial loan. Now where does the high investment returns and their relation to interest rates come into play? “With great risk comes great reward.” We’ll take an example of two apartment complexes in the same neighborhood of similar size and property quality. We’ll call the first property Tranquil Meadow Apartments and the second property Super Saver Apartments. Tranquil Meadow meets all the typical requirements for a conventional commercial loan. Super Saver is exactly the same property except that the renters are HUD Tenants whose rent is subsidized (If unfamiliar with this great government program you can visit the HUD Website listed below). Fear not, lenders are not discriminating against low income housing. They are making very simple and logical risk decisions. This HUD property contains more risk because it takes a highly skilled borrower to run it correctly. Contracts are executed with the government agency and the borrower must keep in compliance with HUD regulations. If the property owner does not continue to keep the property in compliance, then the subsidies can go away very quickly and leave the borrower with a property producing almost no income. So Super Saver deserves a higher rate as the loan made on it is in higher risk of default. To offset this detriment in risk there is the higher expected investor return because HUD properties typically pay higher than market rent.Super Saver, $1,125,000 Loan at 7% and 30 year amortization with $375,000 Down:33 Units with average rent of $550/month.33 X $550 = $18,150/month-$8,150/month in expenses =$10,000 Net Operating Income (The income left after normal operating expenses are deducted)-$7,496.13 Monthly Loan Payments=$2,503.87 Positive Cash-FlowTranquil Meadow, $1,125,000 Loan at 6% and 30 year amortization with $375,000 Down:33 Units with average rent of $520/month.33 X $520 = $17,160/month-$8,150 in expenses (note the exact same number for both properties) =$9,010 Net Operating Income-$6,758.88 Annual Loan Payments=$2,251.12 Positive Cash-FlowWe can see clearly that even though the rent difference is only $30/month per unit it is more than enough to make up for the 1% difference in interest rate. Sometimes the variance between subsidized rents and market rents is $100 or more a month per unit. The annual return on investments from a cash-flow stand point for both properties in our example are as follows:Super Saver:$30,046.44 ÷ $375,000 = 8.012% ROITranquil Meadow:$27,013.44 ÷ $375,000 = 7.204% ROIFrom our very conservative example, the difference is about $3,000 or about eight tenths of a percent better per year in return. As mentioned, many times these returns can be increased much more than in our arbitrary story. These higher returns are made possible by higher interest rate loans for properties with inherently higher risk factors. So next time your lender quotes a rate higher than you would get on your home, stop and think about the big picture. Investigate the bottom line for those slightly higher risk properties if it is in line with your own investment risk tolerance and reap the rewards.
Small businesses are an important part of the American economy. According to the National Federation of Independent Business (NFIB), they supply roughly 55 percent of all jobs in the private sector, and they generate about half of all privately generated Gross Domestic Products (GDP), according to some estimates. There are over 27 million small businesses in the United States. They can be self-employed, home-based, Internet-based, and owned by men, women, and minorities, producing a very broad range of innovative products and services. Yet they continue to struggle in securing financing to start or grow their businesses.Small businesses have always relied on commercial banks for business loans. The increase in bank consolidations has resulted in larger banks, making it more difficult for the small business owner to secure funding for their business. Since more than 60% of small businesses rely on credit lines and loans, and the bulk of this financing comes from the banking sector, small businesses are increasingly looking for more sources to fund their businesses.The good news is that there are many other sources available for small business owners, including government-backed loans, and grants. The major difference between the two is that loans need to be repaid; grants do not. However, the U.S. government, recognizing the important role that small businesses play in our national economy, recently announced the availability of interest-free ARC loans. Grants and ARC loans offer two additional sources for small business funding that are worth investigating.Business GrantsGrants are not loans. Grants are free money that does not have to be repaid. Government grants are offered only to local and state, educational, and public housing organizations, and non-profits, and do not apply to start-ups. In addition, the government may offer some specialized grants to companies engaged in environmental efforts like energy efficiency and recycling, as well as businesses that train youth and senior citizens on the latest technology. That’s why they are referred to as “special purpose grants.” So, where do other small businesses go for grant money?Grants are available from local government agencies and private corporations and organizations. Some of the private sources include trusts and foundations such as the Gates Foundation, the Lilly Endowment, Ford Foundation, Hasbro Industries Charitable Trust, W. K. Kellogg Foundation, the Kipling Foundation, Clorox Company, Allstate Foundation, and International Paper Company. Each source has their guidelines on what type of business will qualify for grant money, and the business owner must meet the criteria. Grant money can be as small as $500 or as large as $5 million. The application process is long and tedious, requiring the applicant to present a solid business plan. The competition for grants is keen with no guarantee that the applicant will receive the money. But for small businesses who qualify and are willing to tough it out in order to get free money, it is worth it.ARC LoansBusiness loans in general differ from grants in that they need to be repaid, with interest. In addition, grants are based on the presentation of a well-written business plan, while loans are based on credit scores and often require collateral.Recently, however, the U.S. government announced a new program of interest-free loans called ARC (America’s Recovery Capital) loans, an extension of the 2009 Recovery Act, offered through the U.S. Small Business Administration (SBA). ARC loans provide up to $35,000 (one time only) of interest-free money specifically to small business owners to help them pay down debt on other loans. In essence, it buys them time to get back on their feet. The loans are available until September 30, 2010, or until the funds are depleted (only 10,000 loans are available), and are offered through SBA lenders only. SBA pays the fee to the lenders; the borrower pays back only the principal. Other specifics on ARC loans include:* Only private, for-profit enterprises up to 500 employees are eligible; non-profits are not eligible
* Business must be at least two years old
* Business must demonstrate an immediate financial hardship
* Loan money can only be used to pay off existing outstanding small business debt
* Loan money is paid out to the borrower over a six month period
* Repayment of the principal begins after the last loan disbursement is received
* Borrower has up to five years to repay the loan principalThe new ARC loans offer both advantages and disadvantages. The advantages include instant cash flow improvement, more money to re-invest in the business, and more time to restructure the business and position it for future success. For some small businesses, it is just what they need to survive. For others, the disadvantages include the strict criteria for qualification and use of ARC loan money. In addition, unlike grant money that does not have to be repaid, ARC loans need to be repaid. So, a small business owner who meets the qualifications must present a solid business plan that convinces the SBA lender they will be in a position to repay the loan within the time period allotted. That is the risk for the borrower, the lender, and the SBA who is guaranteeing the new ARC loans.ARC loans are not for everyone. However, they may be just the solution needed to save some small business owners.