Funding for an 8plex

[Heather Mikel]

For my next deal I am looking to purchase an 8plex. So far the best fixed financing I have found is a 5 year mortgage. The purchase price is $500,000 in Texas. Does anyone know of any mortgage brokers that offer a 20 or 30 year mortgage on this type of property? To keep my COC return high I of course will want to put as little down as possible.

Lenders, you may be able to shed some light on this, what I cannot understand is how a $500,000 multifamily property with secured leases and history of positive cash flow is so much "riskier" than a single family home of $500,000. (Assuming the buyer is well qualified.) In the multifamily scenario, the mortgage is paid via the tenants and shows cash flow profits besides, and in the single family home scenario the mortgage drops the buyer's income after expenses significantly. So why is it I am readily approved for a loan on a residence for $500,000 but am having difficulty finding funding for $500,000 for the 8plex, which is providing income rather than taking it away? Is it simply because the market for these types of loans are so much smaller?

The second issue is, with single family homes I have been purchasing as a personal investor, for something bigger like this, should I be looking at purchasing under an LLC?

Thanks so much in advance for your thoughts and feedback! 

[Jeff Copeland]

You will likely be required to purchase under an LLC since a 5+ unit property is considered commercial. 

Commercial financing is different from conventional residential financing, so you aren't comparing apples to apples. 

And note that is most likely isn't a 5-year amortized mortgage, it's probably a 5/1 ARM. Here is Chase's definition of a 5/1 ARM (because it was quicker for me to cut and paste than to explain it):

"A 5/1 adjustable rate mortgage (5/1 ARM) is an adjustable-rate mortgage (ARM) with an interest rate that is initially fixed for five years then adjusts each year. The “5” refers to the number of initial years with a fixed rate, and the “1” refers to how often the rate adjusts after the initial period."

You also need to understand how the loan is amortized (usually for 15-25 years (meaning the payments are structured as if you were paying for 15-25 years) and what the term is - typically there is a "balloon" payment due at the end of some time period that is less than the amortization period. For example, the loan could be amortized for 25 years, but with a 15 year balloon. 

That basically means you make payments as if the term were 25 years (which makes your payments much lower), but at the end of 15 years, the gig is up, and you have to either pay off the remaining mortgage balance (the balloon), refinance into a new mortgage, or sell. 

You might want to do some research on how commercial financing works, so you can better discuss and compare available loan products with lenders.

Hope that helps!