residential vs Commercial

[Brian Plajer]

Hello,

  I am wondering if it's possible to buy two residential properties that total 6 units in order to package it as a commercial purchase. Does anyone know if this can be done? The reason for considering this is to avoid the 25% down required if buying them separately as residential properties from the same seller. thanks

[Marty Johnston]

@Brian Plajer I do both Residential and Commercial mortgages, and you could do either option in the scenario you presented, just structured in a variety of ways:

RESIDENTIAL:
1) 2 separate loans, one for each parcel/property, this will require all income documentation (pay stubs, W2s, possibly tax returns [if you have other SREO or self employment business income] and use your personal income + 75% of the gross market rents for the two properties to calculate your debt to income ratio)

COMMERCIAL:
1) 2 separate loans, one for each parcel/property, (NO personal income needed) using only the anticipated rental income from the property to service the mortgage. Commercials DTI equivalent is D.S.C.R. (Debt Service Coverage Ratio). Most lenders like a 1.20 DSCR, some will go to 1.10, others 1.0 (1.00 DSCR would mean that for every $1,000 in a mortgage payment [PITIA], you receive a gross $1,000 in monthly rental income. 1.20 DSCR would mean you receive $1,200 in gross rental income on the property), and there are even no DSCR programs out there so you can show LOSSES and still get a mortgage. These no DSCR loan programs are mostly reserved for STR's or where the borrower recognizes future opportunity to raise rents that a lender can't utilize for qualifying at time of purchase.

2) 1 blanket loan to purchase both properties. (NO personal income needed) using only the anticipated rental income from the property to service the mortgage as well. Note some lenders require that a portfolio has a minimum of 3 properties to consider a blanket loan. This will depend on the lender. Some will still consider just the two.

Keep in mind, commercial lenders will usually have both of the following:
1) Minimum value per property, based on the appraised value or purchase price (whichever is LESS!) for 1-4's this is often times $100,000, but some will go as low as $45,000 in a portfolio loan

2) Minimum value per UNIT. This one often goes missed by investors. This basically means if you have a 3-Unit property, and you're purchasing for $105,000, you MEET the minimum value per property requirement, but this property represents a value per unit/door of $35,000. This is below most commercial lenders minimum value per unit requirement. In this same scenario, if this was a 2-unit, you'd ave a value of $52,500 /unit, which MEETS most lenders minimum value /unit requirement + value /door requirement.

The above scenarios can sometimes be 'dismissed' or exceptions given when loan amounts exceed $1,000,000.

Hope this helps!