Commercial Real Estate - Personal Mortgage is that a possibility?

Question

Do we need to form a LLC to buy Commerical Property Mortgage? Can we buy Personal Mortgage for Commerical Properties, based on my reading an umbrella insurance will suffice. Let me know

Cherie Ganesh · Answer

Sumesh

As a new commercial investor you best source of financing will typically be a lender you have had residential mortgages with but if they don't do commercial loans get a referral from them to a local bank that does small commercial loans. Such loans typically require a minimum 20% down and term of loan is relative to the term of the lease with 5-10 years typically. Amortization periods can vary from 10 yrs to 25 yrs based on your credit and the credit of the tenant. Interest rates are typically a little higher than residential mortgages but upfront fees can be nominal. Such loans can usually be rolled over for another term but interest rate will be tagged to market at that time. Find a reputable commercial broker in your market to represent you and help guide you through your first commercial investment.

David Faulkner · Answer

It depends on what you mean by "personal mortgage" ... it is my understanding that a traditional, fannie mae/freddy mac, 30 yr fixed mortgage, the kind that typically have the best rates and terms around, are available for residential property, which means 4 units or less, with 25% down if it is purchased as a rental (as opposed to a primary residence), and you can get up to 10 of those mortgages in your name (plus 10 more in your spouse's name if you're married and structure them properly) ... now, when you go into commercial property, 5 units or more, then you get into commercial mortgages, or portfolio loans, or private money, but they are not from my understanding eligible for the same residential mortgages described above. Even among the commercial mortgages, though, there are many different "flavors". One of those flavors are recourse vs. non-recourse loans. If it is a recourse loan, whether it is within a LLC or not, then you will personally sign for the loan, meaning that if things go pear shaped the bank can and probably will come after your personal assets to make themselves whole, but the advantage will be better rates and terms, lower down payment, and easier to get ... on the other hand, there are non-recourse loans, which have no personal backing by you, is off the property alone, and if things go south the bank can't come after your personal possessions. These require a much higher down payment, are harder to get, and have stricter terms such as higher rates and pre-payment penalties ... these are typically used more at the higher end, more experienced investors, larger and more valuable commercial property, more ultra high net worth investors that want leverage but don't want to put their significant assets at risk. It is probably a moot point, though, as I have doubts on if a newbie without track record or an experienced partner could even qualify for a non-recourse loan. If somebody knows better, then please feel free to correct me, but this is my understanding.

Joe Hughis · Answer

@Sumesh Vadassery - Welcome to BP.  No, you do not necessarily need to form an LLC or other entity to buy a commercial property (and/or mortgage).  If you qualify, you can get a loan and take ownership of the property/mortgage in your own name.

Not sure what you mean by an umbrella insurance?  Those types of insurance policies are available for multiple properties.  However, that is a separate topic all together.

Cheers!

Sumesh Vadassery · Answer

Agree on banks will come after other properties with out an LLC. I was more looking at the possibility of buying a commercial property with a regular residential mortgage. Even with commercial mortgages, dont think i will have a tough time to get if I want. I am a newbie to commercial properties, not quite a newbie in overall RE.

Sumesh Vadassery · Answer

Thanks @Joe Hughis . Thats what I was looking for.

Commercial Real Estate - Personal Mortgage is that a possibility?

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