Commercial loans vs residential

[John Anderson]

Hi all,

I have been investing in a couple of duplexes and single-family homes for the past two years and I would like to look into buying a small apartment complex. I was thinking about something between 6-10 units.

However, I am unfamiliar with how commercial loans work, and I was wondering if more experienced investors could highlight some of the big differences between commercial versus residential. Any advice would be greatly appreciated. Thanks!

[James Wenzel]

You can benefit from the residential government backed loans for up to 10 mortgages linked to your name (residential covers up to a 4 plex).  Get to 10 at low interest then do the rest in commercial loans if you are going to buy more SF to 4 plex.  

As far as commercial and apartment complexes.  You will need to reach out to brokers so they can explain the process and requirements to you.  Typically there are a few requirements to get a commercial loan for an apartment complex:

- Net worth of individual or team needs to equal the value of the property.  $5mil property, need $5mil in net worth.

- Cash reserve/liquidity requirements, depends on the bank, usually they like you to have 6months to float the payments if something goes wrong.

- Experience requirement - Usually the commercial lenders will underwrite the deal then look at your experience in deals.  They might even ask for a Schedule of Real Estate Owned (SREO) to make sure you have strong track record. 

- All of the above requirements can easily be solved if you just add a partner of Key Principle with all of the above.  

The best advice, is to go to a Multifamily Conference.  They have them all over the country every month.  You can learn a lot and get plugged in to minimize mistakes and buy the best deal.